Dollar Edges Higher; Euro Hit by Weak German Factory Orders

The dollar traded higher Monday, boosted by uncertainty over the omicron Covid variant and expectations the Federal Reserve will quickly tighten monetary policy, while the euro weakened after disappointing German factory orders.

At 2:50 AM ET (0750 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.3% to 96.365, not far off November’s 16-month peak of 96.938.

GBP/USD traded flat at 1.3232, USD/JPY rose 0.3% to 113.10, while the risk-sensitive AUD/USD rose 0.2% to 0.7016, rebounding from a 13-month low.

Additionally, EUR/USD fell 0.3% to 1.1284, with the euro hit hard after German manufacturing orders fell much more than expected in October, dropping 6.9% on the month after a revised increase of 1.8% in September, further clouding the growth outlook for manufacturers in Europe’s largest economy.

The safe-haven dollar has received a boost from the uncertainty surrounding the omicron variant of the coronavirus, with the U.S. Centers for Disease Control and Prevention stating on Sunday that the new variant has now been found in about 15 U.S. states so far.

“We know we have several dozen cases and we’re following them closely. And we are every day hearing about more and more probable cases so that number is likely to rise,” CDC Director Dr. Rochelle Walensky told ABC News in an interview.

However, the dominant factor helping the greenback has been the public acceptance by Federal Reserve Chair Jerome Powell last week that inflation was going to stay high for longer than previously predicted, and the central bank would have to take this into account when setting policy.

Even last week’s disappointing nonfarm payrolls release did little to shake market expectations of a more aggressive U.S. tightening, especially with Friday’s consumer price report expected to show another sharp rise in the annual November number.

“Fed Chair Jay Powell’s comments … that inflation is effectively no longer transitory has seen the policy-sensitive U.S. two year yield stay firm above 0.60% on the view that the Fed’s normalization of monetary policy is locked and launched,” said analysts at ING, in a note.

The futures market is almost fully priced for a hike to 0.25% by May of 2022 and to 0.5% by November.

Aside from the Federal Reserve, the Reserve Bank of Australia is expected on Tuesday to hold its cash rate at a record low of 0.1% at its final meeting of the year.

Traders will be looking for any clues about the RBA’s review of its bond-buying program on Feb. 1, the first meeting of 2022.