Dollar near one-week high on expectation of hawkish Fed

December 14, 2021

By Sujata Rao

LONDON (Reuters) – The U.S. dollar stood just off a one-week high on Tuesday versus a basket of major currencies on expectations of a hawkish Federal Reserve meeting and uncertainty about the Omicron coronavirus variant.

Data later in the day on U.S. factory gate inflation may cement expectations the Fed will announce an accelerated tapering of its stimulus, allowing it to wrap up bond-buying around March and proceed with rate hikes.

The PPI, which has been a fairly reliable forward indicator for consumer inflation, may have surged above 9% on a headline level in November as higher oil prices bit, up from 8.6% in October and 1.9% in January.

Some relief on the COVID-19 front – Pfizer said final analysis of its antiviral pill showed its effectiveness including against the new Omicron variant — pushed the dollar off earlier highs but it is seen benefiting, at least in the near term, from a more aggressive Fed policy stance versus central banking peers.

Senior Mizuho economist Colin Asher said traders had been resuscitating dollar long positions that were unwound when the discovery of Omicron forced a cutback in rate hike bets.

“For a few days after Omicron struck, the worst performers were the commodity and global growth focused currencies. Now that trade has reversed to some extent. The dollar should remain firm until markets are convinced U.S. inflation has peaked,” Asher said.

By 1130 GMT, the dollar index, which measures the currency against six peers, was down 0.2% at 96.139, having earlier risen to 96.493, the highest since Dec. 7.

POLICY DECISIONS

The Fed’s two-day meeting starting later on Tuesday headlines a string of policy decisions this week, from central banks such as the European Central Bank, Bank of England, the Swiss National Bank and the Bank of Japan.

But while money markets price good odds of a Fed rate hike by June, no moves are expected any time soon from the ECB, BOJ or SNB, while the Omicron threat could force the BoE to postpone a rate hike until February.

There is a high bar for the Fed to surprise hawkishly, but even if it met expectations “they are still streets ahead of the ECB”, analysts at Westpac told clients, adding they considered dollar index pullbacks into the mid-95 level as a “buy”.

The euro firmed 0.3% to $1.1319 after touching a one-week low of $1.12605 overnight. Germany’s Ifo institute on Tuesday predicted the German economy to shrink by 0.5% quarter-on-quarter in the final three months of this year and to stagnate in the first three months of next year.

The dollar was little changed at 113.520 yen, though sterling rose 0.3% after data showed employers hired a record number of staff in November.

That keeps alive chances of a Thursday rate hike, Asher said.

“But for Omicron there is no doubt they would have been hiking, with Omicron it’s 50:50,” he added.

Mainland China, meanwhile, detected its first Omicron case but offshore-traded yuan firmed 0.12% versus the dollar, bucking a weaker official guidance rate .

Leading cryptocurrency bitcoin inched off Dec. 4 lows hit on Monday, but remains some 30% below record highs reached in early November.

(Reporting by Sujata Rao in London and Kevin Buckland in Tokyo, Editing by Raissa Kasolowsky and Ed Osmond)

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