Dollar Rises on Fed Expectations, Omicron Worries Ease

By Reuters
Reuters
Reuters
December 28, 2021 Updated: December 28, 2021

NEW YORK—The dollar rose on Tuesday on expectations the Federal Reserve could raise interest rates as early as March to counter rising inflation, while a global rally in stock markets knocked the safe-haven Japanese yen to a one-month low.

The dollar index, which measures the currency against six major rivals, was 0.217 percent higher at 96.261.

The greenback had been trading lower in the overnight session as riskier currencies rallied, but it strengthened after 9 a.m. Eastern time when data showed U.S. home prices rose 1.1 percent in October from September and were up 17.4 percent year-over-year.

“We just got a reminder that what we’re really dealing with is inflation and what we’re really dealing with is the Fed,” said Joseph Trevisani, senior analyst at FXStreet.com.

Fed funds futures are pricing better than 50 percent odds for a first quarter-point rate hike by March, odds that were “unheard of just two weeks ago,” Trevisani said.

The Fed said in a policy statement on Dec. 15 it would end its pandemic-era bond purchases in March and pave the way for three quarter-percentage-point interest rate hikes by the end of 2022 as the economy nears full employment and inflation continues to surge.

The safe-haven yen touched a nearly one-month low against the dollar during the Asian session as global stock markets followed Wall Street higher.

yen-note
A Japan yen note is seen in this illustration photo taken on June 1, 2017. (Thomas White/Illustration/Reuters)

The Japanese currency weakened as far as 114.935 yen per dollar, its weakest since Nov. 26, before recovering to last trade around 114.795.

The S&P 500 opened on Tuesday at a new record high, helped by retail sales data on Monday that eased worries that the highly infectious Omicron coronavirus variant would scupper the economic recovery.

“Markets globally are optimistic” that the fallout from Omicron will be contained, said Osamu Takashima, head of G10 FX strategy at Citigroup Global Markets Japan.

The fact that U.S. equities rallied despite expectations for faster Fed tightening “implies that currently investor risk appetite must be very, very strong,” he said.

The Australian dollar, often considered a liquid proxy of risk appetite, rose to $0.7263, its highest level since Nov. 22, before pulling back to last trade at $0.7224.

Sterling, which often rises when risk sentiment improves, touched a one-month high of $1.3461, and fell to $1.3420 against the strengthening greenback.

The euro declined 0.3 percent to $1.1290.

In cryptocurrencies, bitcoin fell below $50,000 and was down 3.92 percent.

By John McCrank

Reuters