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The U.S. dollar continued to show strength Wednesday, helped by comments from the head of the U.S. central bank that the outbreak of the deadly coronavirus in China has done little to alter the expected path of U.S. interest rates.

At 03:10 ET (0810 GMT), EUR/USD traded at 1.0916, just off Monday’s four-month low. GBP/USD traded at 1.2969, just 0.1% higher. The U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98.627, up 0.1%, approaching the levels last seen in mid-October.

Overnight, U.S. Federal Reserve Chairman Jerome Powell said in remarks before U.S. lawmakers that the central bank is closely monitoring the fallout from the deadly coronavirus outbreak in China, “which could lead to disruptions in China that spill over to the rest of the global economy.”

However, Powell stopped short of saying the disease had changed the central bank baseline outlook for the U.S. economy.

“The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market and inflation returning to the committee’s symmetric 2% objective,” Powell said. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate.”

The January 2021 Fed funds futures currently suggests the market is pricing in at least one rate cut of 25 basis points by the end of 2020, but employment growth has been a lot stronger than expected over the last couple of months and sentiment surveys have tended to surprise to the upside.

Even if the Federal Reserve does make a quarter-point cut this year - one is fully priced in by September - a base rate of then 1.5%for fed funds would still be considerably higher than what most other developed market central banks can offer.

The flip side of dollar strength is the weakness of the euro.

“EUR/USD continues to be weighed down by concern about the coronavirus and its impact on the eurozone economy,” said analysts at ING in a research note. “At this point, a break below the 1.0900 mark (also, a multi-year low) seems in the cards, especially as we expect a round of grim eurozone data this week.”

The first grim data point is likely to be the December industrial production figure for the euro zone, at 05:00 AM ET (1000 GMT), which is expected to have fallen by 1.6% month in December, an annual fall of 2.3%.

Also of note, Sweden's central bank left its benchmark interest rate unchanged, as expected, after surprising the market by raising in December by 25 basis points to 0%, ending five years of negative rates.

"The minutes from the December meeting emphasised that the Riksbank could cut rates again if needed," said ING, "although in reality we think the bar to either cut, or indeed hike rates anytime soon is set relatively high."

Thus any move would have an impact of the Swedish krona. At 03:10 AM ET (0810 GMT), EUR/SEK traded at 10.5076. The krona has risen around 0.3% against the euro since the Riksbank hiked

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NZD/USD rebounds to one-week high

The Reserve Bank of New Zealand kept its benchmark rate unchanged at 1% at this morning’s policy meeting while noting that the coronavirus is emerging as a downside risk for the local economy. Already the tourism industry is taking a hit, with Chinese nationals barred from entering the country, and other export markets could suffer.

In addition, the RBNZ adjusted its rate path higher, seeing the June 2020 Overnight Cash Rate (OCR) at 1.01% versus 0.9% previously and the June 2021 level at 1.1%, also from 0.9% prior.

Ahead of the meeting, most analysts were expected a no-change announcement but interest rate markets were implying an 80% chance of a cut, so the unchanged announcement and upward adjustment to the rate path meant the reaction post-meeting was greater than normal. The kiwi surged more than 1% versus the US dollar and Japanese yen, while AUD/NZD fell the most since November 13.

Q1 GDP forecast halved

In the subsequent press conference, Governor Orr mentioned that the Bank has assumed the coronavirus would last six weeks, but doubted there would be a need for policy adjustment due to the virus effect. The Bank had removed half of the expected GDP growth in Q1 from its forecasts. Westpac estimates the virus shock could trim Q1 GDP to just 0.1% while ASB Bank predicts a 0.1% contraction.

NZD/USD rose the most since December 2 and tested the 100-day moving average at 0.6470. The 200-day moving average sits above at 0.6501.

In the first day of his semi-annual testimony, Fed Chairman Jerome Powell said the US economy seemed quite resilient, though the coronavirus outbreak remains an uncertainty. He added that as long as incoming information about the economy remains broadly consistent with the current outlook, the monetary policy stance will likely remain appropriate. He also didn’t mention any shift to current policy thinking that rates will remain on hold throughout 2020.

Most US indices crept higher yesterday, posting modest incremental gains to reach new record highs. The rally was extending during a quiet Asian session, with US indices adding between 0.11% and 0.20%. Asian equities were mixed, with the Japan225 index slipping 0.32% while the China50 index rose 0.03%, and the HongKong33 index gaining 0.17%.

Coronavirus update

Optimists looking at the coronavirus data will focus on the fact that the number of new cases in China rose at the slowest pace since January 30, and the increase in the number of virus-linked deaths slowed to 97 from 108 the previous day. Should we see the number of new cases grind to a halt in the not too distant future, that would a boon for risk appetite.

Powell part two

The data calendar is again quite barren today, with Powell’s second day of testimony the major highlight. He’s not likely to shift from the tone of yesterday’s testimony and it is the Q&A session which will garner more interest.

Euro-zone industrial production probably fell 1.6% m/m in December, wiping out November’s small increase of just 0.2%. ECB’s Lane is scheduled to speak today. The UK reveals its Autumn budget statement while Fed’s Harker speaks before Powell’s testimony.

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• USD/INR registers three-day losing streak.
• Coronavirus headlines seem to drive the trade sentiment while odds of the US-India trade pact add strength to the Indian rupee (INR).
• News from China, the US Fed will be the keys to watch.

USD/INR extends losses, currently around 71.21, -0.10%, as the Indian markets open for trading on Wednesday. The pair recently takes clues from optimism in Asia while paying a little heed to the strong US dollar.

In addition to receding cases of coronavirus infections in China, the global rating agency Moody’s statements also strengthened the INR. Coronavirus outbreak in China is expected to have a minimal impact on the Indian ports its rates due to low China-related throughput they handle. The share of China-linked container cargo is less than 5 percent by volume for the Indian ports it rates. Additionally, manufacturers will likely seek alternative sources of supply for components to the extent that supply chain disruptions in China persist, said the rating giant on Tuesday.

Further, the US President Donald Trump will also visit Indian during late-February and is expected to sign a trade pact (hopefully). Additionally, news from Reuters, quoting the country’s economic adviser Sanjeev Sanyal, also pleased the pair sellers as it said that Indian economic growth is likely to rebound from more than a six-year low of 4.5% in the July-September quarter.While portraying the same, the US 10-year treasury yields rise nearly three basis points to 1.616% with most Asian stocks also in green by the press time.

Moving on, India’s December month Industrial Output, prior and expected 1.8%, could offer immediate direction with the second day of the Fed Chair Jerome Powell’s testimony and China headlines likely keeping the driver’s seat.

Technical Analysis

Unless successfully breaking a downward sloping trend line since January 08, at 71.52 now, prices are less likely to avoid visiting 71.00.

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The New Zealand dollar gained almost 1% against its U.S. counterpart on Wednesday in Asia after the Reserve Bank of New Zealand (RBNZ) left interest rates unchanged as expected and said forecasts showed no chance of a cut this year.

The NZD/USD pair last traded at 0.6456 by 12:05 AM ET (04:05 GMT), up 0.9%.

Meanwhile, the AUD/USD pair traded 0.2% higher at 0.6728 as the Westpac Consumer Sentiment Index jumped by 2.3% to 95.5 in February. In January, the index had fallen by 1.8% to 93.4. Economists had forecast a more modest 1.4% rise.

The U.S. dollar index inched up 0.1% to 98.657. Overnight, Federal Reserve Chairman Jerome Powell said the Fed is watching the coronavirus impact carefully, without hinting that any imminent action was needed, claiming he wanted to "resist the temptation to speculate" about the potential disruptions from the outbreak.

"'What will be the effects on the U.S. economy?' 'Will they be persistent?' 'Will they be material?' That’s really the question," Powell said.

On the data front, the U.S. Labor Department's latest Job Openings and Labor Turnover Survey (JOLTS) report, a measure of labor demand, showed job openings in January fell to about 6.43 million, missing expectations of 7 million.

The EUR/USD pair was little changed at 1.0911. Industrial production figures are due out of the Eurozone later today.

The USD/CNY pair was also near flat at 6.9626. On the coronavirus front, China said the death toll from the coronavirus outbreak rose to 1,113 as of Feb. 11, with 97 additional fatalities reported. Confirmed cases of the disease in mainland China rose to 44,653.

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 Asian currencies found support on Wednesday from a slowdown in the spread of coronavirus, but a strong dollar and caution about the rising death toll kept gains in check, while the New Zealand dollar jumped after the central bank dropped its easing bias.

Hubei, the province at the epicenter of the outbreak, reported the lowest number of new infections since Jan. 31 on Tuesday, with 1,068 new cases. China's senior medical advisor also said the outbreak might be over by April.

The U.S. dollar, which has soaked up safe-haven flows as worries about the coronavirus coincided with data showing the U.S. economy's strength, handed back some gains.

The Australian dollar , among the most exposed globally to China's economic fortunes owing to Australia's export profile, stood a percentage point above the decade low it hit on Monday. It was 0.2% stronger at $0.6727.

The euro (EUR=), also seen as vulnerable to an economic slowdown in China, clambered from a four-month low to trade at $1.0916. The Chinese yuan sat at 6.9677 in offshore trade, just below a week-high it hit overnight.

"Markets are looking at the rate of spread, the rate of infection and thinking that maybe it is leveling out and it could be time to move on," said Sean MacLean, research strategist at Pepperstone, a brokerage in Melbourne.

"But so long as it remains contained in China, and the U.S. feels isolated, the U.S. dollar continues to perform well," he said, which would hold back further gains in Asian currencies against the dollar.

Even if the epidemic ends soon, though, its toll is high.

More than 1,100 people have died in China, about 2% of people infected. The economy has also been upended, with factory closures hitting supply chains from car makers to tech firms.

Worries about the eventual fallout have prompted a big selldown in currencies exposed to China, from the tourism-sensitive Thai baht to the oil-export driven Norwegian krone .

Both have lost more than 4% against the dollar this year and have barely recovered. The Japanese yen , a barometer of risk sentiment by virtue of its safe-haven status, remains strong against most majors and was steady at 109.86 per dollar.

"(A) bad scenario of intensification and spreading of coronavirus could cause a global supply shock," said Steve Englander, head of global G10 FX research at Standard Chartered (LON:STAN).

"Behind our views is the sense that global growth momentum is not nearly strong enough for most EM currencies to brush off the risk aversion that persistent fear of the disease would bring."

The New Zealand dollar jumped 0.7% to $0.6458 after the central bank held interest rates steady, as expected, but forecast holding rates there through the year - reducing the likelihood of future easing.

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As broader gauges of implied currency volatility remain near all-time lows, pockets of turbulence are emerging in a potential signal that the foreign-exchange market could be less stable in 2020.

Take the yuan. After rising more than 1.5 per cent in the month prior to the January 15 signing of the US-China trade agreement, the currency has relinquished those gains amid concerns that Chinese growth could stumble as the coronavirus spreads. Singapore, a key financial hub, is seeing historic price swings due to angst around the outbreak.The uncertainty has helped lift Asian currency volatility to its highest level in six months and the greenback to a two-month high, a development that could rekindle efforts by the US administration to "talk down" the dollar.

In addition to anxiety about growth, the yuan may also sway more freely due to a clause in the phase-one trade deal that reaffirms commitments to refrain from competitive devaluation, said Alan Ruskin, Deutsche Bank's chief international strategist.

China "will have a harder time in general containing volatility if the US is on the lookout for intervention, or surrogate intervention," Ruskin said by phone.

Both the Australian dollar-yen and New Zealand dollar-yen are "risk blow-up pairs" and can be used as proxies for capturing potential volatility in Asia, Ruskin said. One-year volatility in both pairs is relatively cheap compared to most other Group-of-10 peers, he said.Record low implied volatility in Europe's common currency against the US dollar may have an outsized impact on depressing broader gauges of price swings. But it doesn't mean the euro isn't subject to choppiness elsewhere. Implied volatility in euro-Swiss franc, a barometer of global risk appetite, has climbed to a premium to euro-dollar volatility. At the lowest in more than two years in the spot market, euro-franc is teetering near a key technical level, a breach of which could spark a sharp move lower by the common currency.

Meanwhile, Eastern European currencies have also seen price swings as central bank policy rates diverge. On Thursday, the Czech central bank unexpectedly raised rates 25 basis points to 2.25 per cent to tame inflation pressures.

Whether these pockets of turbulence spread to the broader market could depend on several factors. To be sure, volatility may not return to levels seen a decade ago should central banks continue to actively use their balance sheets to manage liquidity issues or regulatory barriers to capital movement arise.

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The U.S. dollar was little changed on Tuesday in Asia ahead of Federal Reserve Chairman Jerome Powell’s testimony later in the day.

The U.S. Dollar Index that tracks the greenback against other currencies last traded 98.748, up 0.03%.

Powell will testify before Congress on Tuesday on Wednesday. With the global economy bracing for a potential slowdown due to the coronavirus outbreak, traders will focus on Powell’s take on the fallout and see if he would downplay the impact of the coronavirus.

The EUR/USD pair was near flat at 1.0909. Yesterday, the euro fell to a four-month low after data showed Euro area investor confidence missed estimates. Investors are worried that the euro area economy will weaken further as the coronavirus continues to spread rapidly.

"The coronavirus and its impact on the global supply chains is seen as a much bigger issue for Germany than for the U.S., thus EUR/USD pair is under pressure," ING said.

On Monday, the World Health Organization warned that the spread of cases among people who have not been to China could be "the spark that becomes a bigger fire".

The disease has claimed 1,016 lives in China so far, Chinese health officials reported on Monday.

The USD/CNY pair was down 0.2% to 6.9694.

Meanwhile, the USD/JPY pair gained 0.2% to 109.91 as Asian stocks recovered. Hong Kong’s Hang Seng Index surged almost 2%, while South Korean stocks also rose more than 1%.

The AUD/USD pair rose 0.5% to 0.6716. Data from the Australian Bureau of Statistics showed Australia’s December home loan lending accelerated to its highest level since July 2018.

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The U.S. dollar remained in demand Tuesday, boosted by its safe haven status as the coronavirus outbreak continues to spread and also by signs of strength from the U.S. economy.

At 03:00 ET (0800 GMT), EUR/USD traded at 1.0911, marginally up on the day, after falling to a four-month low on Monday. Similarly, GBP/USD traded at 1.2909, just 0.1% lower, having touched a two-month low of $1.2870 Monday. Futures on the Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98.773, up 0.1%, having climbed as high as 98.858 on Monday, its highest level since mid-October.

The death toll from the coronavirus continues to mount, claiming over 1,000 victims in mainland China and infecting over 40,000 people.

Measures of returning workers and passenger traffic flows within China suggested the virus had "a devastating impact on China's economy in January and February," said analysts at Nomura in a research note.

Anticipation of lower Chinese demand has has kept commodity-like currencies on the defensive for the last couple of weeks, with the Aussie dollar still close to a 10-year low and the Brazilian real, Russian ruble and South African rand all falling by between 3.7% and 5.6% over the last month.

Anticipation of lower Chinese demand has has kept commodity-like currencies on the defensive for the last couple of weeks, with the Aussie dollar still close to a 10-year low and the Brazilian real, Russian ruble and South African rand all falling by between 3.7% and 5.6% over the last month.

"The coronavirus hitting has money going into the U.S. dollar," said Westpac FX analyst Imre Speizer in a Reuters report. "You've seen a good run of economic data in the U.S., that's been another support.”

On Friday, the U.S. nonfarm payrolls for December continued to show robust employment growth, while sentiment surveys have tended to surprise to the upside.

Attention now turns to the testimony from Federal Reserve Chairman Jerome Powell to Congress, on both Tuesday and Wednesday.

The Fed has made clear its intentions to keep its powder dry regarding interest rates in the near future.

Also of interest will be the release of the U.K. gross domestic product figure for the fourth quarter of 2019, at 04:30 AM ET (0930 GMT).

The U.K. economy probably narrowly avoided a contraction at the end of 2019, with the Investing.com poll forecasting no growth on the quarter, resulting in annual growth of 0.8%.

Any upside surprise could boost a weak pound, but the tricky trade negotiations with the EU are likely to leave sterling on the back foot for the foreseeable future.

Also of interest will be a speech by European Central Bank President Christine Lagarde at 09:00 AM ET (1400 GMT). The central bank is in the middle of a major strategic review, and any comments from Lagarde over whether it changes its inflation goal will be of interest. Chief economist Philip Lane and newly-appointed board member Isabel Schnabel are also due to speak in the course of the day.

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- The U.S. dollar and Japanese yen were in demand on Tuesday, along with the bonds of both countries, as worries about the spread of coronavirus had investors heading for safe harbors.

The World Health Organization said overnight that the spread of cases among people who have not been to China could be "the spark that becomes a bigger fire".

Coronavirus has killed 1,016 people in mainland China, Chinese health officials said on Monday, though they also reported a drop in the number of daily new cases.

The dollar, seen as a safe haven owing to its position as the world's reserve currency, stood by a four month high against the euro at $1.0910 (EUR=). Against a euro-heavy basket of currencies it also stood at a four month high of 98.832 (DXY).

The greenback touched a three-month high of $0.6378 per New Zealand dollar , and at $0.6686 per Aussie dollar was not far above the decade peak of $0.6657 hit on Monday .

"It's been helped out by a lot of things," said Westpac FX analyst Imre Speizer.

"The coronavirus hitting has money going into the U.S. dollar," he said. "You've seen a good run of economic data in the U.S., that's been another support ... the vulnerable ones are the commodity countries like Australia and New Zealand."

China's central bank has moved to support the economy by cutting interest rates and flushing the market with liquidity. But with the extent of spread and its impact still unknown, investors have dumped currencies exposed to China for dollars and yen.

That left the yen fairly stable against the dollar - it last sat at 109.75 yen per dollar - but gaining steadily on other Asian currencies. Trading was subdued with Japanese markets closed for a holiday.

The Australian and New Zealand dollars have dropped more than 4% on the yen this year (AUDJPY=D3) (NZDJPY=D3). The Singapore dollar has lost 3% in as many weeks (SGDJPY=R).

U.S. Treasury and Japanese government bond prices have steadily climbed this year.

"The risk of a larger downgrade in Chinese GDP growth over Q1 20 and 2020 as a whole is gaining momentum," said Richard Grace, chief currency strategist at Commonwealth Bank.

"With China's economy accounting for some 17% of world GDP, but accounting for a significant contribution to growth in the global economy, the risk of a larger downgrade to global growth is clear," he said.

"Upside in AUD/USD is limited, and downside risks continue to mount."

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