Dollar recovers after Fed rate cut hit

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The dollar recovered lost ground against a basket of currencies on Wednesday, a day after an emergency interest rate cut by the Federal Reserve knocked the U.S. currency to an eight-week low.

The U.S. central bank surprised investors by slashing rates by 50 basis points to a target range of 1.00% to 1.25%, two weeks ahead of a regularly scheduled policy meeting, in an effort to combat the economic impact of the coronavirus.

The dollar index <=USD>, which measures the greenback's strength against a basket of six major currencies, was 0.19% higher at 97.315. The index slipped as low as 96.926 on Tuesday, its weakest level since Jan. 8.

"The dollar has found its feet after a phase of underperformance against the euro and some other major currencies," Jonathan Coughtrey, managing director at Action Economics, said in a note.

Data on Wednesday also provided a boost. U.S. private payrolls increased more than expected in February, pointing to labor market strength before a recent escalation of recession fears ignited by the coronavirus epidemic.

A rise in U.S. services sector activity to a one-year high in February also suggested underlying strength in the economy despite the coronavirus outbreak.

Even so, analysts were hesitant to call for a big rebound for the dollar.

"The Fed still has more room to cut than other major central banks," said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. "What that means in functional terms is that the dollar's downside is a little bit larger."

On Wednesday, the euro , which has been one of the currencies to climb on the broad-based dollar weakness of recent weeks, was 0.28% lower at $1.114.

"With the ECB about to cut imminently, it has deflated the euro balloon a bit," Stephen Innes, chief market strategist at Australian FX services provider AxiCorp, said, referring to the European Central Bank.

Money markets in the euro zone are pricing a 90% chance that the ECB will cut its deposit rate, now minus 0.50%, by 10 basis points next week .

The Canadian dollar weakened against the greenback on Wednesday after the Bank of Canada slashed its benchmark interest rate to 1.25% from 1.75% due to the coronavirus outbreak and said it was prepared to cut again if needed to support economic growth.

Sterling rose 0.44% against the dollar, as incoming Bank of England Governor Andrew Bailey hurt expectations for a BoE rate cut by saying that any measures to counter the economic hit from the coronavirus outbreak would be best done in tandem with Britain's government.

GRAPHIC: Global foreign exchange rates - https://fingfx.thomsonreuters.com/gfx/mkt/13/2861/2826/Pasted%20Image.jpg

(Reporting by Saqib Iqbal Ahmed; Editing by Jonathan Oatis and Leslie Adler)

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