Dollar dives to 20-week low against yen on Fed rate cut hint

(This Feb 29 story corrects yen moves in headline, lead and penultimate paragraph)

By Kate Duguid

NEW YORK (Reuters) - The U.S. dollar slid to a 20-week low against the Japanese yen on Friday after Federal Reserve Chair Jerome Powell suggested the central bank could cut interest rates in the wake of the coronavirus.

Powell on Friday said the central bank will "act as appropriate" to support the economy in the face of risks posed by the coronavirus outbreak, though he said the economy remained in solid condition.

The Japanese yen <JPY=> was on track for its largest daily gain since May 2017 as investors moved into the safe-haven currency. It had strengthened to as high as 107.52 versus the dollar and was last trading up 1.51% at 107.92.

The dollar index was last down 0.324% to 98.127 <=USD>, down about 1% this week on rising expectations of a rate cut. A cut of at least 25 basis points at the Fed's March meeting was fully priced in on Friday, versus expectations of 57.6% on Thursday.

Some investors suggested the Fed could even cut rates sooner.

"It's likely that markets will force the Fed to cut even before the March 18 meeting, and the question is, will that matter? Will that be enough to settle down markets in the near term?" said Bill Zox, chief investment officer at Diamond Hill Capital.

The yield on the two-year Treasury note <US2YT=RR>, which moves with expectations of changes in rate policy, has fallen by about 32.5% this week.

The rapid spread of the coronavirus increased fears of a pandemic, with six countries reporting their first cases and the World Health Organization (WHO) raising its global spread and impact risk alert to "very high".

"The yen is significantly stronger from where it was even last week, when I was hearing people saying that the yen wasn't a safe-haven anymore. We're now back to appropriate levels," said Mark McCormick, global head of foreign exchange strategy at TD Securities.

McCormick said one additional factor undermining the yen could be the fact that Japan's public pension funds have been rebalancing assets.

"I think it's pretty clear that the (Japanese Government Pension Investment Fund) is trading ahead of the announcements of their weights, which if you think about what they've done over the past five years, they've created an allocation that leans much more towards global equities, global credit, global fixed income - which in this environment would see dollar-yen rally as they're pushing some of their flows outside of Japan."

(Reporting by Kate Duguid in New York and by Olga Cotaga in London; Editing by Diane Craft and David Gregorio)