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The US dollar weakened on Tuesday as expectations grew that the Federal Reserve would cut interest rates this year to relieve pressure on the economy caused by China's coronavirus outbreak.

The dollar rose last week to its highest in years as the virus spread further around the world, with investors regarding all US assets as safe havens. But money managers now think the Fed may be more inclined to cut rates, since it has the most room to do so.

Against a basket of other currencies the dollar slipped 0.265% to 99.066, after reaching a three-year high of close to 100 last week. However, without good news on the virus, few expect the dollar to give back much of its recent gains.

Lee Hardman, currency analyst at MUFG, said he expected "some downside risk for the US dollar," given the Fed's potential dovish shift in policy. Expectations for further Fed easing continue to build, with money markets pricing in a 25- basis-point cut for the meeting in June.

Versus the euro, the dollar was modestly weaker, last down 0.1% at $1.086. Market gauges of implied volatility in euro/dollar eased on Tuesday after rising to their highest since October on Monday.

"The USD lost upside momentum on Monday. Why? The USD has already appreciated dramatically in 2020 and some positioning/valuations look more stretched," said Alan Ruskin, chief international strategist at Deutsche Bank.

The yen last traded up 0.55% at 110.10 per dollar.

China's yuan was last up 0.16% at 7.024 per US dollar in the offshore market, after rising to a five-day high earlier in the session.

Copyright Reuters, 2020

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