LDN - Business

Dollar near one-week high, hawkish Fed overshadows cbank peers

[December 14, 2021] By Sujata Rao

LONDON (Reuters) - The U.S. dollar scaled a one-week high on Tuesday versus a basket of major currencies, supported by expectations of a hawkish Federal Reserve meeting and continued uncertainty about the Omicron coronavirus variant.

Data later in the day on U.S. factory gate inflation may cement expectations the Fed will announce an accelerated tapering of its stimulus, allowing it to wrap up bond-buying around March and proceed with rate hikes.

The PPI, which has been a fairly reliable forward indicator for consumer inflation, may have surged above 9% on a headline level in November as higher oil prices bit, up from 8.6% in October and 1.9% in January .

(For graphic on, US PPI: https://fingfx.thomsonreuters.com/gfx/
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Senior Mizuho economist Colin Asher expects the dollar to benefit from the Fed's more aggressive policy stance versus central banking peers, as traders resuscitated dollar long positions that were unwound after the discovery of the Omicron COVID variant saw U.S. rate hike expectations pared back.

"For a few days after Omicron struck, the worst performers were the commodity and global growth focused currencies. Now that trade has reversed to some extent. The dollar should remain firm until markets are convinced U.S. inflation has peaked," Asher said.

By 0930 GMT, the dollar index, which measures the currency against six peers, was flat at 96.304, having earlier risen to 96.493, the highest since Dec. 7.

The Fed's two-day meeting that begins later Tuesday headlines a string of central banks announcing policy decisions this week, including the European Central Bank, Bank of England and the Swiss National Bank on Thursday and the Bank of Japan on Friday.

But while money markets currently price good odds of a Fed rate hike by June, no moves are expected any time soon from the ECB, BOJ or SNB, while the Omicron threat could force the BoE to postpone a rate hike until February.

There is a high bar for the Fed to surprise hawkishly, but even if it met expectations "they are still streets ahead of the ECB", analysts at Westpac told clients, adding they considered dollar index pullbacks into the mid-95 level as a "buy".

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A money changer counts U.S. dollar banknotes at a currency exchange office in Ankara, Turkey November 11, 2021. REUTERS/Cagla Gurdogan/File Photo

The euro slipped 0.07% to $1.1278 after touching a one-week low of $1.12605 overnight. Germany's Ifo institute on Tuesday predicted the German economy to shrink by 0.5% quarter-on-quarter in the final three months of this year and to stagnate in the first three months of next year.

The dollar was little changed at 113.565 yen while sterling was flat, not far off the one-year low of $1.31615 reached last week as the market weighed the possibility of a rate rise this week.

In the UK, Tuesday's data showed employers hired a record number of staff in November, a sign the labour market withstood the end of government furlough schemes. Offsetting that is Prime Minister Boris Johnson's warning of a "tidal wave" of infections.

"But for Omicron there is no doubt they would have been hiking, with Omicron its 50:50," Asher said.

Mainland China meanwhile detected its first case of Omicron infection. While official yuan guidance was set weaker, offshore-traded yuan inched higher versus the dollar, though well off recent three-year highs.

Leading cryptocurrency bitcoin inched off December 4 lows hit on Monday, but remains some 30% below record highs reached in early November.

(Reporting by Sujata Rao in London and Kevin Buckland in Tokyo; Editing by Raissa Kasolowsky)

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