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FOREX-Dollar loses its luster as rate cut expectations rise

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NEW YORK, Feb 27 (Reuters) - The dollar fell on Thursday as Treasury yields continued to plumb new lows and investors bet the Federal Reserve would cut interest rates to offset the impact of the spreading coronavirus, lifting the euro to its highest in more than three weeks.

Money markets are now fully pricing in one 25 basis point cut in U.S. interest rates by April and three by March 2021. Expectations for a European Central Bank rate cut have also risen; money markets now price a more than 80% chance of a 10 basis point rate cut in July.

"We're seeing a major reversal of the dollar's fortunes," said John Doyle, vice president of dealing and trading at Tempus, Inc.

With U.S. rates much higher, and the scope for them to fall much wider, investors are reversing out of the dollar.

"Rate cut expectations have gained momentum and U.S. rate expectations are falling a lot more than they are in the euro zone," said Thu Lan Nguyen, an analyst at Commerzbank.

Whether or not the dollar retreats further depends on economic data on the coronavirus's impact on confidence and trade outside of China, Nguyen said.

Against the euro, the dollar fell to a three-week low, last down 1.14% to 1.100. The dollar index dropped 0.76% to 98.358, its weakest since Feb. 6.

It has shed roughly 1% since last week, when it touched a near 3-year high thanks to its safe-haven currency credentials and investors' belief that the U.S. economy was relatively sheltered from the coronavirus fallout. But the currency's safe-haven appeal has worn off.

One-month volatility in euro/dollar, which was near record lows, has shot up to its highest since early October.

New coronavirus infections are now growing faster outside China than within, stoking fears that the economic impact on supply chains and consumer demand might be far greater than previously anticipated.

Investors have rushed for the safety of U.S. government debt. Ten-year U.S. Treasury yields slumped for the third consecutive day to a record low of 1.254%.

The dollar dropped 0.58% to 109.77 Japanese yen as the yen's safe-haven appeal began to return.

China's offshore yuan strengthened to a one-week high, with the dollar down 0.2% at 7.007 yuan per dollar. The Australian dollar, seen as a proxy for investor sentiment towards China, rebounded 0.67% to $0.659, away from 11-year lows touched on Wednesday. (Reporting by Kate Duguid in New York and Tommy Wilkes in London; Editing by Andrea Ricci)

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