US dollar wobbles on Omicron shock moves

London

THE US dollar strengthened then dipped in early European trading on Monday (Nov 29), the euro fell and the yen steadied, as currency markets reversed some of Friday's moves, calming somewhat after the initial shock over the new variant of Covid-19.

The Omicron variant, first detected in southern Africa, prompted a financial markets sell-off on Friday on fears that it would further disrupt the economic recovery after the 2-year pandemic. The World Health Organization said it was not yet clear whether Omicron, which has been found around the world, is more transmissible than other variants or if it causes more severe disease.

Markets calmed somewhat on Monday, however, with US stock futures and oil prices rebounding, as investors took a more balanced view, waiting until the impact of the variant becomes more clear.

The US dollar index, which had its biggest 1-day drop since May on Friday, was at 91.195 at 10.54 am GMT, overall unchanged on the day and still close to Friday's levels.

The greenback's status as a safe-haven currency means it can benefit from uncertainty, but it fell on Friday because the Omicron variant was seen as possibly affecting when the Federal Reserve and other major central banks will raise rates.

Euro-dollar 1-month volatility hit its highest since December 2020 around 1 am GMT on Monday before dropping back down.

"Friday's move was overdone, but the economic outlook is even more uncertain than it was a week ago," wrote Kit Juckes, head of FX strategy at Societe Generale, in a note to clients.

The euro, which rose versus the dollar on Friday, was down around 0.3 per cent at US$1.12815.

European Central Bank (ECB) policymakers sought to reassure investors, arguing that the eurozone's economy had learned to cope with successive waves of the pandemic.

Commerzbank's head of FX and commodity research Ulrich Leuchtmann wrote in a client note that the euro had initially benefited from the Omicron variant because of the dovishness of the ECB.

"If Omicron leads to lockdowns and a renewed reduction in economic activity on a global scale, all rate hike expectations turn out to be in vain and then they will be priced out again pretty quickly," he said. "And which currencies will be the relative winners? Of course, the ones where rate hikes were never priced in very much in the first place. And those were euro, yen, and Swiss franc." REUTERS