Dollar Down, Caution Reigns After Hawkish Powell Comments

The dollar was down on Wednesday morning in Asia. The safe-haven yen held steady, while the risk-sensitive Australian dollar remained near a one-year low after U.S. Federal Reserve Chairman Jerome Powell signaled quicker asset tapering even as risks from the omicron COVID-19 variant remain.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched down 0.07% to 95.935 by 11:35 PM ET (4:35 AM GMT).

The USD/JPY pair was up 0.30% to 113.46.

The AUD/USD pair was up 0.61% to 0.7167 and the NZD/USD pair was up 0.51% to 0.6856.

The USD/CNY pair inched down 0.02% to 6.3626, with China’s Caixin manufacturing purchasing managers index (PMI) for November, released earlier in the day, at 49.9.

The GBP/USD pair edged up 0.18% to 1.3319.

As research into current vaccines’ efficacy against the latest variant of COVID-19 continues, some investors are worried that hasty monetary tightening could impact the global economic recovery.

“Investors are staying cautious. It’s very difficult to make a judgment about the impact of omicron when we don’t have a lot of information,” Bank of America-Merrill Lynch chief Japan FX strategist Shusuke Yamada told Reuters.

Moderna Inc. (NASDAQ:MRNA) CEO Stéphane Bancel said existing COVID-19 vaccines would be less effective against omicron. However, BioNTech SE’s (F:22UAy) chief executive Uğur Şahin struck a more cautiously positive note, saying its vaccine developed with Pfizer Inc. (NYSE:PFE) would likely offer strong protection against severe disease from omicron.

Powell testified before the Senate Banking Committee hearing alongside U.S. Treasury Secretary Janet Yellen on Tuesday. In his testimony, he said that the Fed will discuss whether to wrap up asset tapering a few months earlier than scheduled when it meets later in the month.

Although Powell finally veered away from describing high inflation as “transitory”, he was confident that omicron’s impact would be less severe than when the COVID-19 pandemic erupted in 2020.

Investors responded to Powell’s comments by winding up interest rate hike expectations.

Powell and Yellen will testify before the House Financial Services Committee later in the day.

“Powell’s unexpectedly hawkish tone overnight, essentially asserting that inflation risk has primacy over growth/omicron risks, should leave the dollar index forging ahead,” Westpac analysts said in a note. The note also recommended buying dips in the index down to the mid-95 level.

Dollar Down, Caution Reigns After Hawkish Powell Comments