By David Henry
NEW YORK (Reuters) - The U.S. dollar rose again on Tuesday after rebounding from a dip that nearly wiped out its gains from the day before as markets jostled with the different paths major central banks are choosing between fighting inflation or the economic drag of the pandemic.
The U.S. dollar index measuring the currency against major peers was up 0.2% at 96.5520 in afternoon trading in New York after having earlier given up much of its Monday gain of 0.3%.
The rebound came largely at the euro's expense as markets digested another report of unexpectedly high U.S. inflation that could push American interest rates much higher and sooner than in Europe.
The dollar's safe-haven appeal also improved as stock indexes fell in the United States and in Europe, and as oil dropped on a prediction that the spreading Omicron variant of the coronavirus will dent global demand.
The euro was down more than 0.2% at $1.1256, near a one-week low at 3:39 p.m. ET (2039 GMT)..
The contrast between the monetary policies of the U.S. Federal Reserve and the European Central Bank is driving the euro-dollar exchange rate, said Ron Simpson, global currency analyst at Action Economics in Safety Harbor, Florida.
The Fed will update its policy on Wednesday and the ECB on Thursday.
"It's like there's no end in sight to the dovishness for the ECB, whereas it seems like every meeting the Fed is getting a little more hawkish," said Simpson.
The Fed is expected to indicate on Wednesday that it will quicken its taper from bond buying. That would open the door sooner for increases in overnight lending rates.
The dollar's gain on Tuesday was likely given an extra lift by covering of dollar-short positions after the inflation report and ahead of the two central bank meetings, he added. "I don't think it was so much a matter of initial fresh, long-dollar positions."
The latest sign of higher U.S. inflation came earlier on Tuesday with data showing that producer prices increased more than expected as supply constraints persisted. The data showed the biggest annual gain in at least 11 years.
"It's clear the Fed needs to react to higher inflation," said David Riley, chief investment strategist at BlueBay Asset Management. "It's an environment where it's very hard not to be positive on the U.S. dollar."
Markets have been pricing for the Fed to wrap up bond-buying around March and proceed with rate hikes.
The British pound gained 0.1% to $1.3224 after data showed employers hired a record number of staff in November.
The Japanese yen lost ground, with the dollar trading at 113.73 yen.
Commodity-associated currencies, including the Australian and Canadian dollar, lost to the greenback as Brent crude prices dropped toward $73 a barrel. The International Energy Agency (IEA) said the Omicron coronavirus variant is set to dent the global demand recovery.
The tension between the dollar and the euro that mirrors Fed and ECB choices is dramatically different from the start of the pandemic when central banks tended to make similar moves.
The Fed and ECB meetings headline a string of policy decisions this week that also will come from the Bank of England, the Swiss National Bank, the Bank of Japan and others.
While money markets are pricing good odds on a Fed rate hike by June, no moves are expected anytime soon from the ECB, BOJ or SNB. And, the Omicron threat could force the BoE to postpone a rate hike.
Cryptocurrency bitcoin was up 2% at $47,789 at 2039 GMT, but remains some 30% below record highs reached in early November.
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Currency bid prices at 3:39PM (2039 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index
96.5520 96.3660 +0.20% 7.303% +96.5850 +96.0910
Euro/Dollar
$1.1256 $1.1286 -0.26% -7.87% +$1.1324 +$1.1255
Dollar/Yen
113.7300 113.5850 +0.15% +10.09% +113.7500 +113.4300
Euro/Yen
128.01 128.17 -0.12% +0.86% +128.5600 +128.0000
Dollar/Swiss
0.9241 0.9224 +0.20% +4.47% +0.9244 +0.9190
Sterling/Dollar
$1.3224 $1.3211 +0.11% -3.20% +$1.3256 +$1.3192
Dollar/Canadian
1.2856 1.2812 +0.34% +0.95% +1.2863 +1.2800
Aussie/Dollar
$0.7106 $0.7136 -0.42% -7.62% +$0.7135 +$0.7090
Euro/Swiss
1.0403 1.0408 -0.05% -3.74% +1.0417 +1.0390
Euro/Sterling
0.8510 0.8536 -0.30% -4.78% +0.8553 +0.8511
NZ
Dollar/Dollar $0.6743 $0.6752 -0.15% -6.11% +$0.6770 +$0.6735
Dollar/Norway
9.1035 9.0430 +0.64% +5.99% +9.1150 +9.0480
Euro/Norway
10.2500 10.2071 +0.42% -2.08% +10.2865 +10.1919
Dollar/Sweden
9.1412 9.0864 +0.32% +11.53% +9.1479 +9.0665
Euro/Sweden
10.2905 10.2572 +0.32% +2.12% +10.3085 +10.2516