Dollar rises with stocks, investors stay cautious

By Kate Duguid

NEW YORK (Reuters) - The U.S. dollar rebounded on Wednesday from a two-week low hit in the previous session in step with U.S. equity markets, though moves were muted as investors remained cautious as the coronavirus continues to spread.

The dollar index <=USD> was 0.13% higher at 99.144 as Wall Street's main indexes rose about 1% on Wednesday after suffering their worst four-day percentage fall in more than a year.

"We're still fixated on equity market moves," said Shaun Osborne, chief foreign exchange strategist at Scotia Capital.

However, he said, "ranges are pretty contained. I don't think anybody is reading too much into this rebound in equities at this point."

"On a day without much data, we're going to continue tracking stocks.

The dollar was also dented as investors scaled back expectations that the U.S. Federal Reserve would signal more policy easing in response to the spread of the coronavirus outside of China.

As the coronavirus spread, some investors no longer saw the U.S. economy as immune and started to bet the Fed would have to cut interest rates to support growth.

But Fed Vice Chair Richard Clarida said on Tuesday that while the central bank is monitoring the impact of the epidemic on the U.S. economy, it is still too soon to gauge if it would require a change in monetary policy.

Expectations of a rate cut at the Fed's June meeting fell from 80.8% to 79.2% today, according to CME Group's FedWatch tool.

Broader market sentiment remained cautious, with implied volatility gauges on euro/dollar rising to 4-1/2 month highs while commodity currencies like the Australian and the kiwi dollar came under fresh selling pressure.

"The broader theme of risk aversion is still impacting foreign exchange markets, though markets are starting to reprice some of their excessive policy easing expectations," said Manuel Oliveri, a currency strategist at Credit Agricole in London.

That was evident in expected price swings for the euro currency, with one-month maturities rising to an early October high of 5.7% after hitting a six-year low of 2.3% last week. <EUR=>

But gyrations in derivatives had little impact on broader cash markets, with the single currency struggling to push above the $1.09 level on Wednesday. It was trading at $1.087.

(Graphic: EUR-USD Implied Volatility - https://fingfx.thomsonreuters.com/gfx/mkt/13/2556/2524/EURUSD%20implied%20vol.png)

(Reporting by Kate Duguid in New York and Saikat Chatterjee in London; Editing by Steve Orlofsky)