Dollar Edges Higher; Omicron, Hard-Line Russian Stance in Focus

© Reuters.

By Peter Nurse

Investing.com - The dollar edged higher in early European trade Wednesday, but ranges are tight as traders continue to assess the impact of the Omicron Covid variant as the year-end approaches.  

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.1% to 96.558.

USD/JPY rose 0.1% to 114.16, EUR/USD fell 0.1% to 1.1267, GBP/USD dropped 0.1% to 1.3252, after Britain's economy grew more slowly than previously thought in the July-September period, while the risk-sensitive AUD/USD dropped 0.2% to 0.7137.

“The week before and the one after Christmas are notably a low-volatility period for most asset classes including FX,” said analysts at ING, in a note. “This year some seasonal tendencies will be mixed with the Omicron variant threatening to force new restrictions and markets still processing a week full of key central bank decisions.”

Still, looking at the bigger picture, Omicron infections are multiplying across Europe, the United States and Asia, causing many countries to consider new restrictions on movement to the likely detriment to risk sentiment, thus benefiting the safe-haven dollar.

Additionally, the U.S. Federal Reserve announced the speeding up of the withdrawal of its bond-buying program last week, potentially bringing forward interest rate hikes to the first half of 2022. 

This contrasts with the still very accommodative stance of the Bank of Japan, while the European Central Bank only slightly reined in stimulus last week, still ruling out any interest rate hikes next year..

Another factor that could support the dollar near term is the growing tension on the border between Russia and the Ukraine, following reports Russia is massing troops in preparation for invasion.

President Vladimir Putin took a hardline stance in a speech Tuesday, saying Russia had no room to retreat in a standoff with the United States over Ukraine and would be forced into a "military-technical" response unless the West backed down.

In response, a Biden administration official stated U.S. officials are considering tough export control measures to disrupt Russia's economy should invade Ukraine.

USD/RUB dropped 0.2% to 73.8510, with the ruble benefiting from the Bank of Russia hiking interest rates by 100 basis points late last week, its second such move this year.

Elsewhere, USD/TRY dropped 0.3% to 12.4859, with the lira rebounding from record lows against the dollar after President Recep Tayyip Erdogan unveiled measures earlier this week to support the currency, including a program to protect savings from fluctuations in the lira.