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By Peter Nurse
Investing.com - The dollar inched higher in early European trade Monday at the start of a week that includes a number of central bank meetings, including the Federal Reserve, while concerns over the Omicron Covid variant remain.
At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 96.243.
USD/JPY rose 0.1% to 113.52, EUR/USD slipped 0.2% to 1.1286, and the risk-sensitive AUD/USD slipped 0.2% to 0.7154.
GBP/USD dropped 0.3% to 1.3230 after U.K. Prime Minister Boris Johnson warned on Sunday that Britain faces a "tidal wave" of the Omicron variant of the Covid-19 virus, as he accelerated the country’s booster rollout program to try and contain its damage.
The Bank of England is one of the major central banks due to hold policy-setting meetings this week, and these new virus worries are expected to prompt the central bank to opt for caution, pushing back its first rate increase since the pandemic into 2022.
There are also meetings scheduled from the European Central Bank and the Bank of Japan, but it’s the Federal Reserve’s two-day gathering, concluding on Wednesday, which is attracting the most attention.
The Fed is widely expected to announce a faster tapering of asset buying this week, and thus an earlier start to rate hikes, particularly after Chairman Jerome Powell’s recent hawkish speech to Congress and with U.S. consumer prices posting their largest annual gain since 1982 on Friday.
“The Fed is about to signal that it needs to accelerate its tapering process, but market pricing could still become more aggressive,” said analysts at Nordea, in a note. “The ECB will move more slowly. The Chinese authorities have also become more worried about the growth outlook.”
The market is already pricing in a U.S. rate hike of 25 basis points by May, and a move by the Fed to speed up the ending of its bond-buying program is likely to support the dollar, particularly versus currencies whose central banks will likely be slower to tighten.
Elsewhere, USD/CNY fell 0.1% to 6.3629, with the yuan near a three-year high, even as Chinese authorities set its reference rate at a slightly weaker-than-expected level.
The People's Bank of China has announced a hike in the foreign exchange reserve requirement ratio by 200 basis points to 9% from 7% from Dec. 15.
USD/TRY rose 3.2% to 14.3220, the Turkish central bank failing to stop the lira weakening despite intervening late last week in the foreign exchange market for the third time this month.