Dollar out of favour as Omicron leaves currency markets volatile

December 22, 2021: The dollar edged down again in early Asia on Wednesday, starting a third successive session under pressure as investors favored riskier currencies and asset classes.

The New Zealand dollar rose 0.8% on Tuesday, its best day since October, recovering from near a year low to last trade at $0.6757, and the pound gained 0.46% - its best day in a month - last trading at $1.3267.

With the dollar also gaining 0.44% on the safe-haven yen, Tuesday's currency moves were in keeping with advances in oil and a 1.6% gain in MSCI's gauge of stocks across the globe.

The result was the dollar index, which measures the currency against major peers, was last at 96.441 down from as high as 96.994 last week when it was testing a 16 month high.

Market players struggled to point to a clear reason for the "risk-on" mood, saying markets were struggling to assess the consequences of the Omicron variant of COVID-19, leading to unseasonable volatility.

Stocks sold off sharply on Monday and the dollar index had gained 0.7% on Friday.

While the weeks either side of Christmas are typically low in volatility for currencies and other asset classes, analysts at ING said, "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."

Last week Britain became the first G7 economy to raise interest rates since the onset of the pandemic, with the U.S. Federal Reserve also signaling plans to tighten in 2022 but the European Central Bank only slightly reining in the stimulus.

Omicron infections are multiplying across Europe, the United States, and Asia, causing countries across the globe to consider new curbs on movement and reimpose quarantine periods for incoming visitors.

But Bloomberg reports that the U.S. Food and Drug Administration is set to authorize COVID-19 treatment pills from both Pfizer Inc and Merck as early as Wednesday may have helped the mood.

The euro was last at $1.1289 starting Wednesday up marginally, which would be its third successive session of gains.

In emerging market currencies, traders were bracing for another day of volatility for Turkey's lira, which closed up 6% on Tuesday, having been down as much as 8.6% and up as much as 18.5%.

Bitcoin was largely steady just below $49,000 after a 4% gain on Tuesday. Ether, the world's second-largest cryptocurrency, has also been gaining this week and was last just above $4,000.

Reuters