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Dollar Edges Higher; Hawkish Fed Helps, While Omicron Hurts Europe

ForexDec 20, 2021 08:40
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By Peter Nurse - The dollar rose in early European trade Monday, climbing close to its recent high, as the Federal Reserve pointed to early rate hikes while Europe struggles with surging Omicron cases.  

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.1% to 96.595, not far from last month's peak of 96.938, the highest since July 2020.

The U.S. central bank took a hawkish turn last week after its two-day policy meeting, with Fed policymakers agreeing to speed up the removal of its bond-buying program, potentially also bringing forward the first interest rate increase of the post-pandemic period.

This new stance was confirmed by a couple of policymakers late last week, with Fed Governor Chris Waller stating that a rate increase in March would be "very likely", while Mary Daly, president of the San Francisco Fed, said she would support two or three rate hikes next year.

“The Fed has finally woken up to the inflation risks,” said analysts at Nordea, in a note. “While the financial markets are already flirting with the chance of the Fed starting its rate hikes as early as at the mid-March 2022 meeting, we see more room for market pricing to increase longer out.“

The Bank of England also turned hawkish last week, becoming the first G-7 central bank to lift interest rates since the start of the pandemic. However, any benefit to sterling from this move has quickly dissipated as Omicron cases soared, and Britain's health minister declined to rule out tightening restrictions on economic and social activity before Christmas. 

GBP/USD fell 0.2% to 1.3212 after climbing as high as 1.3375 on Thursday, its highest for almost a month, when the BoE hiked interest rates.

EUR/USD edged higher to 1.1255, but this is still near the lowest levels since Dec. 15 after Netherlands went into lockdown on Sunday and Italy confirmed it was considering similar measures.

Elsewhere, USD/CNY climbed 0.1% to 6.3790 after China cut its lending benchmark loan prime rate for the first time in 20 months earlier Monday, in a bid to prop up growth in the slowing economy and support its troubled property sector.

USD/TRY soared 6.2% to 17.4361, the lira falling to fresh record lows against the dollar after the Turkish central bank cut interest rates again late last week, as part of President Recep Tayyip Erdogan's unorthodox approach to tackling rampant inflation.

The lira is down 55% in the year, set to surpass declines in the 2001 financial crisis that brought Erdogan’s AK Party to power. Inflation, meanwhile, is running at over 21%.


Dollar Edges Higher; Hawkish Fed Helps, While Omicron Hurts Europe

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