LONDON - The dollar index was steady and riskier currencies picked up on Tuesday, as traders bet that the Omicron variant of COVID-19 would not be as severe as previously expected.
Asian shares staged a recovery overnight and oil prices climbed as risk appetite improved following reports in South Africa earlier in the week saying that Omicron cases there had only shown mild symptoms.
On Sunday, the top U.S. infectious disease official, Anthony Fauci, told CNN "it does not look like there's a great degree of severity" so far.
"The generally oversold commodity FX segment is likely experiencing a big short-squeeze as the market's fears on Omicron are abating," wrote ING strategists in a client note.
The Australian dollar led gains on Tuesday, up 0.6% at $0.70915 at 0902 GMT following the Reserve Bank of Australia meeting, extending gains from Monday when it had its best percentage gain in seven weeks.
The RBA made no policy changes but said that Omicron was not expected to derail the country's economic recovery. Analysts said that market speculation about quicker tapering of the central bank's bond-buying was also supporting the currency.
"The impact of Omicron ultimately holds the key to the policy direction in the near term, but the RBA has clearly positioned itself among those central banks (like the Fed) that do not currently see the new variant as likely to truly dampen the recovery and policy plan," said ING.
"With still a lot of short positions to be unwound, this is a notion that can continue to offer support to the Aussie dollar in the coming weeks."
The New Zealand dollar was also higher, up 0.1% at $0.6764 and the British pound was steady at $1.3257.
Meanwhile the dollar index was flat at 96.363, while the safe-haven yen was down around 0.2% versus the dollar at 113.705.
Developments in China also contributed to the risk-on tone, as the People's Bank of China (PBOC) said it would lower the amount of cash that banks must hold in reserve. This was its second such move this year and is seen as a way to release liquidity to support economic growth.
Both the onshore and offshore yuan eased following the announcement (because increased liquidity usually hurts currencies) but the yuan then recovered as traders hoped for more supportive measures to stop economic slowdown.
At 0904 GMT, the yuan was up around 0.1% at 6.3697.
Elsewhere, the euro was down 0.2% at $1.1263, still hurt by expectations that the U.S. Federal Reserve will tighten policy more quickly than the dovish European Central Bank.
German industrial output rose more than expected in October in a rare sign of strength in manufacturing, but analysts warned that supply bottlenecks for raw materials and intermediate goods would continue to hamper production in Europe's biggest economy.
Markets will be watching for Germany's ZEW economic sentiment survey which is due at 1000 GMT.
Also in focus is a video conference between U.S. President Joe Biden and Russian President Vladimir Putin, in which Biden is expected to say that Russia will be hit with the toughest economic sanctions yet if it invades Ukraine.
The Russian rouble firmed ahead of the call.
Major cryptocurrencies continued to recover following the weekend's crash. Bitcoin was up around 1.6% at $51,339.5, still below the all-time high of $69,000 reached last month.
(Reporting by Elizabeth Howcroft; Editing by Catherine Evans) ((Elizabeth.Howcroft@thomsonreuters.com; +44 02075427104;))