Dollar on front foot ahead of busy week

December 13, 2021: The dollar inched higher at the start of a busy week of central bank meetings, including at the Federal Reserve, which is expected to drive currency markets and help the dollar, although concerns about the coronavirus weigh heavily on traders' minds, as Reuters reported.

The pound lost 0.16% to $1.3257 after British Prime Minister Boris Johnson said on Sunday that Britain faces a "tidal wave" of the Omicron variant of coronavirus and that two vaccine doses will not be enough to contain it.

The euro slipped 0.17% to $1.1292, while the greenback gained 0.1% on the yen to 113.5.

Moves were muted, however, compared with the last two weeks when news of the new coronavirus variant caused sharp swings in currencies along with other major asset classes.

Investors initially rushed into safe-haven assets, although reports that Omicron may not be as bad as feared caused these flows to reverse last week.

"All I want for Christmas is clarity," analysts at Barclays headlined a research note.

Breaking news about the Omicron variant aside, the most significant scheduled events for currency markets this week are central bank policy meetings, with six of the G10 central banks and a number of emerging-market central banks set to meet.

"Central banks will need to strike a difficult balance between Omicron-induced uncertainty and elevated inflation levels," the Barclays analysts said.

The most important meeting is the Federal Reserve's two-day gathering which wraps up on Wednesday.

Investors now expect the Fed to signal a faster tapering of asset buying this week, and thus an earlier start to rate hikes. It will also update the dot plots for rates over the next couple of years.

The market is already well ahead, with a rise to 0.25% fully priced in by May. 

If the Fed does as expected it would likely support the dollar, particularly versus currencies whose central banks will likely be slower to tighten.

"The Fed meeting certainly could prove the catalyst for EUR/USD to break down to 1.10," said ING analysts in a note, adding that they thought USD/JPY could also be pressing 115 post-Fed.

Both the European Central Bank and the Bank of Japan will review their policy settings this week. A Reuters poll of ECB-watchers predicts it will halve the number of assets it buys each month from April, but that an interest rate rise is years away.

Also holding meetings are the Norwegian and Swiss central banks and the Bank of England, which is expected to await further information on the economic impact of the new Omicron variant before hiking rates, a separate Reuters poll found. 

Bitcoin was trading a little under $50,000, off 2% on the day after climbing over the weekend. But the world's largest cryptocurrency still has work to do to reclaim November's record high of $69,000.

Reuters