The dollar edged higher, the euro fell, and the yen steadied on Monday as currency markets reversed some of Friday’s moves, calming after the initial shock of discovering a new coronavirus variant.
The Omicron shocks
Initially discovered in South Africa, the Omicron variant sparked worldwide concern, with financial markets falling on Friday on worries that it may jeopardize the two-year pandemic’s economic recovery.
The World Health Organization stated that it is still unclear if Omicron, which has been detected worldwide, is more transmissible or causes more severe illness than other variations.
Investors adopted a more measured approach on Monday, with U.S. stock futures and oil prices rising, as they waited for the impact of the variation to become evident.
What’s with DXY?
The U.S. dollar index, which experienced its largest one-day decline since May on Friday, began to recover and was up 0.1% on the day at 96.21 at the time of writing.
The dollar’s standing as a safe-haven currency allows it to profit from uncertainty. Still, it dipped on Friday as the Omicron variant was regarded as having the potential to influence when the Federal Reserve and other major central banks boost rates.
The situation with EUR
The euro, which had risen against the dollar on Friday, was trading at EUR 1.12665, down around 0.4 %.
Ulrich Leuchtmann, Commerzbank’s director of F.X. and commodity research, noted in a client note that the euro had originally benefitted from the Omicron variant due to the European Central Bank’s dovishness.
“If Omicron leads to lockdowns and a renewed reduction in economic activity on a global scale, all rate hike expectations turn out to be in vain, and then they will be priced out again pretty quickly,” he stated.
“And who will be the relative winners among the currencies? The ones where rate hikes were never properly priced in the first place, of course. EUR, JPY, and CHF were the currencies in question.”
President Christine Lagarde of the European Central Bank put a brave face on the current virus threat, claiming the Eurozone was better prepared to deal with the economic consequences of a fresh wave of COVID-19 infections or the Omicron variant.
Yen steady moves
The yen held steady against the dollar, rising 0.2 % on the day to 113.33. EURJPY has dropped to a new nine-month low.
CHF flexing muscles
Similarly, the Swiss franc reversed recent gains. It recorded its highest one-day gain against the dollar since June 2016, a slightly larger daily rise than during the top of the first coronavirus-induced market shock in March 2020, but it was down 0.4 % on the day on Monday.
Currency markets are expected to continue turbulent until the new variation is properly understood, according to analysts.
What to watch out for?
The most significant headline to look for in the coming two weeks will be vaccine effectiveness data and whether symptoms differ from those of other types.
Goldman Sachs stated that it would not change its economic estimates based on the Omicron variation until the impact of the variant is more obvious. BioNTech said on Friday that it expects to know in two weeks if the vaccine it developed with Pfizer would need to be updated.
