Daily Market Pulse

The Dollar down amid Omicron chaos

8 minute read


The U.S. dollar index, which measures the greenback's performance against a basket of six major currencies, closed down 0.12% and continued to extend its drop in the early hours of Tuesday. The U.S. dollar index’s decline follows a setback to Democratic spending ambitions in Washington, as senator Joe Manchin said on Sunday that he would oppose the Biden administration's $1.75 trillion domestic investment measure. Analysts contended that unwinding the fiscal package would result in less stimulus and weaker growth, dragging the dollar down. Additionally, the yield on the benchmark 10-year Treasury note fell 1.4% on Monday as the safe-haven attraction of treasuries surged in response to Omicron worries. However, it rebounded marginally, minimising the dollar index's losses. Elsewhere, the U.S. reports the first death associated with Omicron, in Texas, establishing Omicron as a significant variation in the country, accounting for 75% of cases. Moving ahead, traders will be watching for US President Joe Biden's speech to the country on the Omicron variant and Democrats meeting to draw a forward plan for the stimulus package. 


The Euro closed 0.34% higher against the U.S. dollar and continued to move higher during the early hours of the European trading session on Tuesday, erasing its previous session's losses. For the second consecutive day, the Euro gained ground against a backdrop of sluggish U.S. dollar demand. A shift in risk sentiment – as seen by an overall upbeat tone in the equities markets has eroded the dollar's relative safe-haven status. On the other hand, investors continue to be worried about the economic consequences of the fast spread of the Omicron strain and a blow to Biden’s $1.75 trillion dollars social spending package, which keeps a lid on the markets' risk appetite and positive outlook. Additionally, the Fed's hawkish stance and the recent increase in the U.S. treasury rates expectations restrict the Euro's upward potential. Looking forward, market participants will get cues from Euro Consumer Confidence Index releases and Omicron-related headlines to provide fresh impetus to the currency. 


The Sterling closed 0.26% lower against the greenback, although it gained some positive traction in the early hours of Tuesday’s trading session. The sterling saw fresh buying on Tuesday morning, after two straight days of losses versus the dollar. This comes due to subdued dollar prices and improved risk sentiment, reflected by a positive tone around the equity markets, however, the impending Covid cases and recent reports of 12 deaths in the country as a result of Omicron place a cap on upward movement. Meanwhile, Moderna claims that a booster dosage of its COVID-19 vaccine has proved to be successful against the Omicron strain in laboratory tests. As a result, the FTSE 100 rose approximately 0.9% on Tuesday, tracking European counterparts and somewhat reversing Monday's losses. Elsewhere, the UK public sector's net borrowing fell to £17.4 billion in November, it is still the second-largest deficit since records started in 1993. Thinking ahead, traders will utilize wider market sentiments and Omicron-related headlines to give Sterling further direction.


The Japanese Yen closed 0.04% higher versus the U.S. dollar, although it started to drop marginally on Tuesday morning. The Japanese Yen witnessed a drop after two consecutive days of gains against the U.S. dollar.  This comes after Bank of Japan (BoJ) Governor Haruhiko Kuroda recently said that it was too early to consider normalising monetary policy, reinforcing the belief that the Japanese central bank will lag behind other central banks in reducing monetary stimulus. Meanwhile, investors evaluated Mr. Kuroda's dovish comments against the central bank's plan to reduce corporate debt purchases to pre-pandemic levels and pull down portions of its emergency financing programme once the March 2022 deadline arrived. Elsewhere, the Nikkei 225 Index rose 2.08%, while the wider Topix Index rose 1.47% on Tuesday, as risk sentiment improved significantly in Asia, but investors continued to follow the situation surrounding the omicron variation. Having said that, traders will look at wider market emotions in the absence of a substantial data release to give new direction for the Yen. 


The Loonie closed 0.41% lower against the greenback before regaining its ground slightly on Tuesday morning. The Loonie gained traction as the U.S. dollar fell and crude oil prices rose ahead of Tuesday's European trading day. The greenback for the second day in a row as market confidence improves, while the U.S. treasury yield falls by 1.43%. Meanwhile, West Texas Intermediate (WTI) Crude oil prices have joined the risk-on trend, rising by 1% on Tuesday morning. On the contrary, the first Omicron-related fatality in the United States and warnings from the World Health Organization (WHO) challenge the risk appetite and restrict further Loonie advances. Elsewhere, the S&P/TSX fell 1% to a two and a half-week low level, as investors worried that the Omicron variant might delay global recovery and demand for oil. Following that, traders will be looking for October retail sales numbers in Canada as well as crude oil prices to provide further direction.


The Mexican peso finished 0.13% lower against the U.S. dollar and extended its downward movement heading into Tuesday's trading session. The Mexican Peso on Monday traded at the highest levels since November 18th and outperformed its peers as a higher-than-expected interest rate rise last week overshadowed worries about the effect of the Omicron covid variant on the economic recovery and oil demand. The Mexican Central Bank (Banxico) raised borrowing rates by 50 basis points to 5.5%, above market estimates of 25 basis points. Covid instances, on the other hand, have been increasing internationally, with the more infectious Omicron variant becoming prominent and more governments declaring additional limits. Elsewhere, Mexican Economy Secretary Tatiana Clouthier is meeting virtually today with Canada's Trade Minister Mary Ng to oppose a U.S. electric-vehicle tax credit. Moving ahead, traders will keep an eye on the Mexican Private Spending data release for Q3 and wider market sentiments to provide fresh momentum to the Peso. 


The Chinese Yuan closed 0.07% higher against the U.S. dollar and continues to advance modestly on Tuesday’s morning session. The offshore Yuan rose against the U.S. dollar, aided mostly by weakening in the greenback and better investor risk sentiment throughout Asian markets. However, market players' attention has switched to whether the currency's recent gains will be sustained in the next year, with traders pulling down long bets in the last two weeks on fears that authorities may rein in the currency's recent advances. Since mid-November, the People's Bank of China's (PBoC) official midpoint has consistently been lower than market forecasts. Meanwhile, the nation cut its one-year Loan Prime Rate (LPR) for the first time in 20 months in an effort to support the faltering economy, decreasing it by 5 basis points to 3.8% as predicted. Following that, the Shanghai Composite Index jumped 0.88% on Tuesday, while the Shenzhen Component Index rose 0.82%, as real estate stocks bolstered the market despite mounting hints of Beijing's marginal policy loosening.


The Brazilian Real closed 0.48% lower against the U.S. dollar and continues heading downwards during Tuesday's early trading session. The currency traded at its lowest level since October 22nd, as the market mood was weakened by the resurgence of Omicron fears amid a jump in cases and new European lockdowns. The Netherlands led the way by imposing a nationwide lockdown on Sunday, and the prospect of more Covid restrictions being imposed ahead of the holidays loomed over numerous European nations. Also impacting on the currency's attractiveness is investors' assumption that the Brazilian economic recovery has started to fall due to increasing inflation and increased interest rates. Meanwhile, the major Sao Paulo stock index, the Bovespa, fell 2% on Monday, its lowest since December 2nd, mirroring a negative attitude in foreign markets because of rising fears about the economic effect of the rapidly spreading Omicron Covid-19 strain.


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