Traders are switching from the risk appetite currency to the US Dollar due to the central bank's monetary tightening and the development of the Omicron infection case.
The US dollar surged at the weekend, outperforming other major currencies such as the Euro and the Australian Dollar. EUR/USD was down 0.8% to 1.1238, while AUD/USD was down 0.81% to 0.7124. On the other hand, the US Dollar Index rose up 0.70% to 96.67.
Fed Officials Get Hawkish, Europe Busy Prevent Omicron
The Fed's monetary policy has the most influence on the current movement of the US Dollar. The reason is, Fed officials continue to give statements with hawkish sentiments after the announcement of the results of the FOMC meeting last Thursday. The Fed's Board of Governors member, Chris Waller, said that an increase in US interest rates would almost certainly be implemented as soon as bond purchases ended in March 2022.
"The exact timing of the first rate hike in policy will depend on the evolution of economic activity," Waller said in a speech at the Forecasters Club of New York. "However, with high inflation and employment approaching the maximum, I believe a rate increase will be confirmed in March.
A similar statement was also conveyed by the President of the New York Fed, John Williams. In an interview with CNBC last Friday, Williams said that the US central bank would have the option to raise interest rates once its bond-buying program ended in March.
Traders digested the central bank's policies last week by comparing changes and the pace of rate hikes. In addition to the Fed, which accelerated bond tapering, there was the British BoE which increased the rate to 15 basis points, and the ECB, which cut purchases of PEPP bonds, although still leaning towards an accommodative policy next year.
The development of research results on the Omicron COVID variant is also a concern for traders. A recent study from the UK says that the Omicron variant is five times more infectious than the Delta variant. This has triggered a number of countries in Europe to re-impose travel restrictions and social activities.
The TD Securities team of analysts warns traders not to read too much into exchange rate changes at this stage. After a week of central bank policy, there will be little information to influence price action so the US Dollar is likely to consolidate.
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