Dollar extends gains versus yen as investors bet on Fed rate hikes

The U.S. dollar extended gains against Japan’s yen on Tuesday, hitting new five-year highs as investors bet that the fast-spreading Omicron coronavirus variant would have limited economic impact and that the Federal Reserve would hike rates.

In the second trading day of 2022, global markets extended the upbeat moves seen on Monday.

The dollar’s gains were helped by a rise in U.S. treasury yields, with the U.S. 10-year yield hitting a six-week high.

At 1158 GMT, the dollar index was up 0.2% at 96.398, its highest in 13 days .

Versus the yen, the dollar was up 0.7% at 116.125, extending its overnight gains to reach its highest since January 2017. But it was only the biggest daily gain for the dollar versus the yen since November 2021.

The euro was down 0.2% versus the dollar, at $1.1276 .

Investors see Omicron as potentially less disruptive to the global economy than previous variants, following studies suggesting that the risk of hospitalization is lower.

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

“As long as inflation keeps going up there is scope for the dollar to remain firm,” said Colin Asher, senior economist at Mizuho.

Asher said it could be hard for the dollar to build much further on current strength given so much policy tightening is already priced in “but given the short term momentum, in Q1 we are likely to see the dollar remain pretty firm, especially as we are seeing a very rapid change in asset purchases.

“U.S. inflation may peak in January but the market will take a bit of time to acknowledge that.”
Inflation focus

Asia’s factory activity grew in December as companies withstood rising global cases of the Omicron variant, though persistent supply constraints and rising input costs clouded the outlook for some economies.

“As Omicron is not translating to severe infection and death, the initial risk-off shock has been completely erased and markets are focused on the supply chain impact and inflationary narrative,” Elsa Lignos, global head of FX strategy at RBC Capital Markets, said in a note to clients.

Risk-sensitive currencies were generally up on the day. The Australian dollar, which is seen as a liquid proxy for risk appetite, was up 0.1% at $0.71975, even as hospitalization in the state of New South Wales surpassed the record levels seen during the Delta variant outbreak.

The New Zealand dollar was down 0.2%.

Britain’s pound was up 0.1% at $1.349, while euro-sterling edged down to its lowest since February 2020, 83.57 pence per euro, shortly before midday .

British Prime Minister Boris Johnson said on Monday that the country would “continue with the path that we are on” in terms of measures to limit the COVID-19 spread.

Bitcoin was up 0.5% on the day at $46,651.17, still significantly below its latest all-time high of $69,000 reached in November.

China has released pilot versions of its digital yuan wallet application, the “e-CNY (Pilot Version)” app, as the country’s central bank steps up its push to develop its own digital currency.

Dollar hits five-year high vs yen as Fed rate bets lift U.S. yields

The U.S. dollar reached its strongest level in nearly five years against the Japanese yen on Tuesday, lifted by a jump in Treasury yields as traders bet on an early Federal Reserve interest rate hike despite surging COVID-19 cases.

The greenback rose as high as 115.815 yen for the first time since Jan. 11, 2017, as long-term Treasury yields leapt 12.5 basis points overnight to touch 1.6420% 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.

The dollar index, which measures the currency against the yen and five other major peers, held close to the one-week high of 96.328 reached on Monday.

“The market is pricing in a more aggressive U.S. rate hike scenario – or at least the risk thereof – in 2022, and that definitely remains the key support for the dollar,” said Shinichiro Kadota, senior FX strategist at Barclays in Tokyo.

“The key question for this year is where does inflation go, where does it peak?”

The euro traded at $1.1302, lifting off the one-week low of $1.12795 from overnight.

Sterling slipped to $1.34685, falling back toward the overnight trough of $1.3431, a level not seen since Nov. 29.

The Australian dollar hovered close to a near two-week low of $0.7184 reached in the previous session.

While the surge in coronavirus cases caused by the Omicron variant continued to impact global travel and public services, and delay the reopening of some U.S. schools after the holidays, investors remained optimistic that lockdowns would be averted.

On Monday, the U.S. Food and Drug Administration authorized the use of a third dose of the Pfizer and BioNTech COVID-19 vaccine for children aged between 12 and 15 years, and narrowed the time for all booster shots to five months from six months after primary doses.

Signs that Omicron is highly contagious but leads to less severe illness than variants such as Delta have led to an “Omicron relief trade” buoying stocks and bond yields that could dominate market sentiment through January, OANDA analyst Jeffrey Halley wrote in a note.

For dollar-yen, “assuming that U.S. yields remain elevated, there is nothing on the charts to stop a rally to 118.00 in the coming weeks,” he said.