By Peter Nurse
Investing.com - The dollar climbed to a one-week high Tuesday ahead of the start of a Federal Reserve meeting that is expected to take a hawkish turn.
Concerns over the Omicron Covid variant also boosted safe havens at the expense of higher-yielding currencies.
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 96.365, having climbed as high as 96.454 for the first time since Dec. 7.
USD/JPY rose 0.1% to 113.63, EUR/USD slipped 0.1% to 1.1275, just above a new one-week low of 1.1260 hit overnight, while the risk-sensitive AUD/USD slipped 0.1% to 0.7123.
GBP/USD fell 0.1% to 1.3211, close to the one-year low of 1.3161 reached last week on growing worries over the Omicron variant, but helped by the U.K. claimant count falling almost 50,000 in November, a stronger number than expected.
Optimism surrounding the Omicron variant is on the wane Tuesday, the day after the U.K. announced its first death from this version of the Covid-19 virus.
Additionally, researchers from the University of Oxford announced findings that two doses of current vaccines do not induce enough neutralising antibodies against Omicron, emphasising the importance of booster programs.
This has helped the safe haven currencies, like the U.S. dollar, push higher Tuesday. However, the main focus is on the Federal Reserve, which starts its two-day policy-setting meeting later Tuesday.
The Fed is widely expected to announce a faster tapering of asset purchases this week, and thus potentially an earlier start to rate hikes, particularly after U.S. consumer prices posted their largest annual gain since 1982 on Friday.
“We are also particularly interested in the Fed Dot Plots, which we believe turned the bearish dollar trend around in June this year,” said analysts at ING, in a note. “Assuming the Fed does shift to a median expectation of two hikes in 2022, we would expect U.S. money market rates to push higher again, taking the dollar with it.”
Money markets currently price in a rate hike by June next year, with another as early as November.
Elsewhere, USD/CNY traded flat at 6.3628, with the yuan remaining near a three-year high, at levels that are starting to frustrate the Chinese authorities.
The People’s Bank of China reduced the reserve requirement ratio for banks earlier this month, sparking speculation it would start cutting interest rates as well.
China should lower interest rates and boost infrastructure investment to ensure the economy will grow by at least 5% next year, an influential Chinese think tank said Monday.
Elsewhere in emerging markets, USD/TRY rose 3% to 14.2010, above the 14 level that prompted the Turkish central bank to intervene on Monday, for the fourth time in two weeks, as traders dumped the currency on prospects of another rate cut given President Tayyip Erdogan's unorthodox policy stance.