The US dollar exchange rate was supported by expectations of a more hawkish Fed policy and increased interest in safe-haven buying in the midst of Storm Omicron.
The US dollar index (DXY) crept up to the 96.30s in trading earlier this week (6/December), although its movement was still limited within the range formed last week. On Friday, the Greenback was not hit by the release of disappointing Non-farm Payroll data. The global reserve currency continues to be underpinned by expectations of a more hawkish Fed policy and increased interest in safe-haven buying in the midst of Storm Omicron.
Non-farm Payroll data shows an increase of only 210k in the November 2021 period, aka less than half the market expectations set at 550k. Fortunately, the US unemployment rate in the period showed a significant decline from 4.6 percent to 4.2 percent.
The mixed conclusions from the publication of employment data prompted market attention to turn back to the opinion of Fed officials. In particular, the US dollar was supported by the testimony of Fed Chair Jerome "Jay" Powell before Congress a few days earlier. Powell stated that Omicron will make the period of high inflation last longer than previously thought, and the central bank needs to take that into account in its next policy formulation.
"Fed Chair Jay Powell's comments... that inflation is effectively no longer transient, has kept the 2-year (US bond) yield firmly above 0.60% on the basis of the opinion that the Fed's monetary policy normalization is certain and announced," ING analysts said in a note cited by Reuters.
The prospect of longer high inflation hints at a hawkish outlook for the Fed's policy. For market participants, this can translate into accelerated tapering and an increase in the Fed's interest rates which has the potential to strengthen the US dollar exchange rate.
Meanwhile, the market is again starting to target the "safe haven" function of the US dollar. Pfizer-BioNTech is likely to release the results of its research on the Omicron variant in mid or late this week (no specific schedule), thus creating uncertainty that tends to benefit safe havens even though today's high risk currencies are trying to rebound.
The US CDC has found cases of the Omicron variant of COVID-19 in at least 15 US states, namely California, Colorado, Connecticut, Hawaii, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, New York, Pennsylvania, Utah, Washington, and Wisconsin. . However, some experts believe that the deployment of Omicron will not interfere with the Fed's plans to accelerate its tapering program this month.
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