By Peter Nurse

Investing.com - The U.S. dollar pushed higher in early European trade Tuesday, making particular gains against the yen on rising Treasury yields as expectations rise that the Federal Reserve will lift interest rates early in 2022 despite rising Covid-19 cases.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 96.310, close to the one-week high of 96.338 reached earlier Tuesday.

USD/JPY rose 0.3% to 115.72, not far removed from its strongest level in nearly five years, boosted by a jump in Treasury yields, with the 10-year yield climbing to 1.64% for the first time since Nov. 24.

Money markets have fully priced in a first U.S. rate increase by May, and two more by the end of 2022.

EUR/USD fell 0.1% to 1.1285, close to a one-week low, despite German retail sales rebounding in November. GBP/USD edged lower to 1.3466, falling back toward the overnight trough of 1.3431, a level not seen since Nov. 29, while the risk-sensitive AUD/USD rose 0.2% to 0.7208, just above its near two-week low hit overnight.

The number in coronavirus cases caused by the Omicron variant has continued to rise, with the U.S. recording a global daily record of over one million cases. While this is affecting global travel and some public services, investors remain optimistic that the economic impact will be limited, allowing the recovery to continue and the Federal Reserve to raise interest rates a number of times in 2022.

“Although equities rallied on diminishing Omicron fears, that same situation has allowed U.S. yields to rise sharply, lifting the U.S. dollar,” said Jeffrey Halley, an analyst at OANDA. “The U.S. dollar rally could peter out if sentiment remains strong, but the moves in equities and currencies highlight what a messy year could be ahead, without the unifying theme of the post-vaccine recovery central bank back-stop in play.”

Investors will focus on the release of the ISM manufacturing PMI for December as well as the November JOLTs job openings later Tuesday as the latest gauges of the strength of the U.S. economy.

Elsewhere, USD/CNY rose 0.4% to 6.3748 despite China's factory activity growing at its fastest pace in six months in December, with the Caixin/Markit Manufacturing Purchasing Managers' Index rising to 50.9, its highest level since June.

USD/PLN rose 0.2% to 4.0581, with Poland’s central bank expected to announce the world’s first interest-rate hike this year later Tuesday, with the country’s inflation soaring.

Polish Governor Adam Glapinski said last week inflation would peak at above 8% in June, and the central bank is expected to hike the benchmark rate by 50 basis points to 2.25% on Tuesday, according to 15 of 17 economists surveyed by Bloomberg. The other two expect a 75 basis-point rise.