IGI Logo

LONDON  - The dollar index flatlined near a one-week low on Thursday, as fears of fallout from the Omicron COVID variant eased, boosting higher risk currencies such as the Australian dollar and British pound.

The dollar index, at 96.159, was unchanged on the day but near its weakest since last Friday. The U.S. dollar rose against the Japanese yen - another safe-haven currency - and was up 0.2% at 114.3, near Wednesday's one-month high of 114.37.

Risk appetite has improved since Monday, when markets were rattled by government restrictions relating to the spread of Omicron.

However, data on Wednesday showed U.S. consumer confidence improving more than expected in December, suggesting the economy would continue to expand in 2022 despite a resurgence in COVID-19 infections and reduced stimulus spending.

A South African study meanwhile suggested reduced risks of hospitalisation in Omicron patients .

The Australian dollar rose 0.3% to $0.7238 after Wednesday's 0.86% surge. The Norwegian crown firmed to one-month highs against the dollar and euro, also boosted by soaring oil and gas prices.

The euro was flat around $1.1327 but sterling rallied half a percent as inflation-adjusted gilt yields were boosted by markets pricing 100 bps in UK rate hikes next year.

U.S. real yields have flatlined since the mid-December Fed meeting.

MUFG strategist Lee Hardman predicts the U.S. dollar correction to be shortlived.

"Hawkish comments from Fed officials over the past week including from Fed Governor Waller and San Francisco Fed President Daly have signalled that they are considering raising rates as soon as the March FOMC meeting," Hardman said.

Graphic: Real yields https://fingfx.thomsonreuters.com/gfx/mkt/egpbkorzmvq/real.PNG

A turnaround could come as early as this afternoon if the U.S. PCE deflator hits new multi-decade highs confirming faster Fed rate rises.

"Runaway underlying inflation will be the catalyst for a further meaningful upward adjustment to fed funds futures in favour of a firmer dollar," CBA analysts told clients though they warned the dollar could be curtailed further if the data hinted inflation was topping off.

Elsewhere, the Turkish lira extended its startling rebound this week, rising another 12% at 10.6 per dollar <TRY=D3>, having traded as weak as 18.4 on Monday.

The big gains came after President Tayyip Erdogan said the government and central bank would guarantee some local currency deposits against FX depreciation losses.

Graphic: World FX rates https://graphics.reuters.com/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index.html