Safe haven currencies pressured by hopes Omicron is mild

Riskier currencies have found buyers

  
George Washington is seen with printed medical masks on the one Dollar near Euro banknotes in this illustration taken, March 31, 2020. Image used for illustrative purpose

George Washington is seen with printed medical masks on the one Dollar near Euro banknotes in this illustration taken, March 31, 2020. Image used for illustrative purpose

REUTERS/Dado Ruvic/Illustration

SYDNEY: The dollar was supported against safe-haven currencies such as the Japanese yen on Tuesday, hanging on to an overnight jump made with U.S. yields as investors hoped early signs the Omicron variant may be mild will be proved correct.

Riskier currencies have also found buyers and the Australian dollar firmed into a central bank meeting that will determine whether or not the Reserve Bank of Australia (RBA) follows the Federal Reserve with talk of early tapering. 

The Aussie had its best day in seven weeks on Monday, rising 0.7%, and hovered around $0.7040 on Tuesday ahead of the RBA at 0330 GMT. The RBA already abandoned its yield target last month, so any further shift in policy or tone will surprise traders.

The yen nursed a 0.6% overnight drop, its largest in two weeks, at 113.47 per dollar. The Swiss franc, another safe-haven currency, suffered its largest one-day percentage fall in nearly three months on Monday. Dropping through its 200-day and 50-day averages to 0.9255 per dollar.

"Although there is still a lot of uncertainty over Omicron's health and economic impact, investors have embraced news from South Africa suggesting the exponential rise in Omicron infections has not been followed by a big wave in hospitalisations," said NAB strategist Rodrigo Catril.

Early observations in South Africa suggest those infected suffer relatively minor symptoms compared with previous virus waves. Anthony Fauci, the top U.S. infectious disease official, also said it doesn't seem too severe. 

Pressure on the euro has resumed as bets firm on higher U.S. interest rates and it fell about 0.2% on Monday to leave it at $1.1283 in early Asia trade.

Fed funds futures have priced in more than two full rate hikes next year, beginning in May and overnight U.S. yields rose along the curve lifting 10-year rates 7.6 basis points and back above 1.4%. 

China, facing a slowing economy, is going in the opposite direction and eased policy overnight with a second cut this year in banks' reserve requirements - though that only seemed to buttress the positive mood and the yuan was steady.

Sterling and the kiwi are the outliers and mostly missed out on a bounce. Sterling last sat at $1.3259, not far above last week's 11-month trough of $1.3194 while the kiwi NZD=D3 traded at a one-year low of $0.6740 on Tuesday.

Speculators are short sterling and Omicron's emergence has added to bets that the Bank of England holds fire on hiking rates at next week's meeting.

By contrast rates are already on the up in New Zealand, but the market seems to figure that's bad for growth.

"It does seem like the market is fatigued with the NZ good news story, and is less willing to reward currencies heading for higher interest rates," said analysts at ANZ Bank.

"They normally signal strong growth, but in a supply constrained world, higher rates may be a signal of slower growth to come. NZ's top of the pile cash rate (and expectations of more hikes to come) certainly aren't helping the NZD."

(Reporting by Tom Westbrook; Editing by Christopher Cushing) ((tom.westbrook@tr.com; +65 6973 8284;))


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