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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.

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.

The dollar ticked up against a basket of rival currencies in holiday-thinned trading on Thursday as a dip in weekly jobless claims data helped ease fears that a surge of COVID-19 infections would curb the economic recovery.

New claims for U.S. unemployment benefits fell in the week leading up to Christmas and benefits rolls slid to their lowest level of the pandemic era the previous week, data showed, signaling no impact on employment from the rapidly spreading Omicron variant.

The better-than-expected report initially helped lift the S&P 500 and Dow Jones Industrial Average indexes to all-time highs on Thursday, extending their record-setting runs before they receded in late trading.

The dip in jobless claims came even as COVID-19 infections in the United States hit a record high for the second day running, Reuters data showed.

“The market is blasé about many of the risks emanating from Omicron right now in terms of growth and the supply chain,” said Adam Button, chief currency analyst at ForexLive.

Low holiday trading volume also meant that moves in the market were likely exaggerated, he added. “By and large, the end of the year is dominated by flows, not fundamentals,” he said.

At 3:15 Eastern time, the dollar index , which measures the greenback against six major peers, was up 0.158% at 95.976, after having been negative in the overnight session.

“There’s definitely cautious optimism around, though the dollar is mostly just recovering the ground it lost yesterday afternoon,” said Kit Juckes, head of FX strategy at Societe Generale in London.

That optimism could be seen in the dollar pulling away from the safe-haven Japanese yen, he said.

The yen touched 115.205 per dollar, its weakest in a month and not far off its November trough of 115.51.

The euro was down 0.19% at $1.1325 after touching a one-month high on Wednesday.

Sterling rose 0.13% to $1.3506.

The Turkish lira continued to slide and was down 4.68% at about 13.1 per dollar, after having fallen 6.9% on Wednesday.

Bitcoin steadied after two days of losses. The world’s largest cryptocurrency was last up 0.72% at $47,568, well off its all-time high of around $69,000 in November.

The dollar and yen were at the low end of their recent ranges in thin holiday trading on Thursday, having fallen overnight as investors favored riskier currencies along with equities.

The moves seemed to be linked to recent improved sentiment as many governments resist imposing new, widespread lockdowns, even as the omicron variant of the coronavirus surges.

Reuters data shows global Covid-19 infections hit a record high over the past seven-days.

“The U.S. dollar resumed its retreat overnight as markets continue to price in finishing Omicron fears thanks to low hospitalisations,” said Jeffrey Halley, a senior market analyst for Asia Pacific at Oanda.

“That has encouraged investors out of defensive positioning and back into the global recovery trade.”

The euro was at $1.1352 in early Asian trading, after gaining 0.35% and touching a one-month high the day before.

The sterling was at 1.3500, its highest since Nov. 19 after a 0.44% overnight gain.

This left the dollar index, which measures the greenback against major peers, at 95.862, languishing near its lowest in a month.

But with many traders away ahead of the year-end, analysts cautioned against reading too much into the moves.

“In times like these we trade very technically as short-term jobbers try to eek out some final year-end gains,” Brad Bechtel, global head of FX at Jefferies, said in a note to clients.

FX flows have been on the “lighter side of usual for a month end,” Bechtel added.

However, rising U.S. yields put a floor under the dollar.

Benchmark 10-year yields reached 1.56% on Wednesday, the highest since Nov. 29, in U.S. trading after the Treasury sold $56 billion in seven-year notes to weak demand.

They last yielded 1.5496%.

The moves in currencies were in keeping with the broader market. In keeping with the risk-on mood, the S&P 500 and the Dow Jones Industrial Average closed at all-time highs on Wednesday, the latter rising for a sixth session.

The safe haven yen was at 114.95 per dollar after touching a one-month low of 115.03 on Wednesday. Its November trough of 115.51 was its lowest since early 2017.

The Australian dollar was at $0.7254, having held onto its recent gains.

The Turkish lira was at 12.6 per dollar having fallen 6.9% on Wednesday in another volatile day.

Despite surging more than 50% last week following state-backed market interventions, it has lost 40% of its value this year. However, Turkey’s Finance Minister Nureddin Nebati said on Wednesday that the current swings in the lira were not worrying and that it would return to normal levels.

Bitcoin fell for a third session in a row. It was last around $46,200, having been trending lower since hitting an all-time high of $69,000 in November.

The safe-haven dollar languished near an almost one-week low against its major peers on Thursday as investors adopted a more optimistic stance about the global economic outlook, despite the rapid spread of the omicron coronavirus variant.

The dollar index, which measures the currency against six rivals, stood at 96.111, not far from the overnight low of 96.020, touched for the first time since Dec. 17.

The risk-sensitive Australian dollar was steady at $0.72125 following Wednesday’s 0.86% surge.

Sterling was little changed at $1.33515 after a 0.63% rally.

Risk appetite has improved since Monday, when markets were rattled by government restrictions relating to the spread of omicron.

However, data on Wednesday showed U.S. consumer confidence improving more than expected in December, suggesting the economy would continue to expand in 2022 despite a resurgence in Covid-19 infections and reduced stimulus spending.

There was also encouraging news from a South African study, which suggested reduced risks of hospitalization and severe disease in people infected with omicron compared with the delta strain.

The euro was about flat at $1.13325 after a 0.33% overnight advance.

The dollar was little changed at 114.16 yen — another safe-haven currency — holding close to an almost one-month high from Wednesday at 114.37.

Many analysts expect the dollar to strengthen in coming months after a hawkish tilt this month at the Federal Reserve put an interest-rate increase in March on the table, setting the U.S. central bank apart from more dovish peers in Europe, Japan, Australia and elsewhere.

Money markets currently price better than 50-50 odds for a hike by the March policy meeting.

“Ongoing data strength should help bolster Fed pricing, particularly amid reports that Omicron appears to be leading to fewer hospitalisations,” TD Securities strategists wrote in a report.

The Aussie and Kiwi dollars on Wednesday, gave up some of their gains from the day before, as a rally in riskier asset classes began to lose steam, though moves were muted as traders started to head out for the holidays.

The Australian dollar lost 0.3% to $0.7130 and the New Zealand dollar lost 0.3% to $0.6747, having both advanced sharply the day before alongside oil and global shares.

With small declines in the pound — also a beneficiary of Tuesday’s rally — and the euro, the dollar index snapped two days of losses and edged a little higher on the day to 96.538, though it was still well within its recent ranges.

The weeks on either side of Christmas are typically low in volatility for currencies and other asset classes, analysts at ING said, though “this year some seasonal tendencies will be mixed with the Omicron variant threatening to force new restrictions and markets still processing a week full of key central bank decisions.”

Last week Britain became the first G7 economy to raise interest rates since the onset of the pandemic, with the U.S. Federal Reserve also signaling plans to tighten in 2022 and the European Central Bank only slightly reining in stimulus.

Investors’ expectations that the Federal Reserve will raise interest rates more aggressively in 2022 than most other major central banks mean the dollar index is looking at close out 2021 not too far from its 16-month high of 96.938 last month.

The index is up 7.3% this year, which would be its best year since 2015.

Omicron continues to keep traders on edge and infections are multiplying across Europe, the United States and Asia, causing countries across the globe to consider new curbs on movement and reimpose quarantine periods for incoming visitors.

But a Bloomberg report that the U.S. Food and Drug Administration is set to authorise COVID-19 treatment pills from both Pfizer Inc and Merck as early as Wednesday may have helped the mood.

In emerging market currencies, traders were bracing for another day of volatility for Turkey’s lira, which closed up 6% on Tuesday, having been down as much as 8.6% and up as much as 18.5%.

Bitcoin rose to $49,600 its highest in over a week. Ether, the world’s second-largest cryptocurrency, has also been gaining this week and was last just above $4,000.

The dollar hovered below recent highs on Tuesday having lost ground overnight after a blow to Democratic spending plans in Washington, but worries about the omicron coronavirus variant kept risk currencies in check.

The dollar index, which measures the currency against six major peers, was last at 96.513, having lost ground on both the euro and the yen.

The greenback briefly approached 16-month highs at 96.914 last week, after the U.S. Federal Reserve opened the door to as many as three interest rate increases in 2022, and then found support as worries about the omicron strain caused investors to seek safety.

However, it pulled back on Monday, finishing the session down 0.12% after U.S. Senator Joe Manchin, a moderate Democrat who is key to President Joe Biden’s hopes of passing a $1.75 trillion domestic investment bill — known as Build Back Better — said on Sunday he would not support the package.

“The dollar pulled back on the breakdown of Build Back Better. Less stimulus, weaker growth, and rates dropping at the short-end was enough to push the dollar slightly lower,” said Kyle Rodda, an analyst at IG markets.

Two-year U.S. Treasury yields on Monday touched 0.5870%, their lowest since Dec. 3, also causing the yield curve to steepen.

The pound was on the back foot at $1.3204 after British Prime Minister Boris Johnson said on Monday he would tighten coronavirus curbs to slow the spread of the omicron variant if needed.

Omicron infections, which are multiplying rapidly across Europe and the United States, and doubling every two or three days in London and elsewhere, caused a sharp sell-off in share markets on Monday as well as oil.

In a sign of the uncertainty, however, Nasdaq and S&P 500 futures both climbed on Tuesday in early Asia.

The Aussie dollar was weak at $0.71055, while the New Zealand dollar was testing 13 month lows at $0.6709.

Turkey’s lira had volatile day on Monday, even by its usual standards, first falling as much as 10% before ending the session up over 20% after President Tayyip Erdogan introduced a series of steps that he said would ease the burden of the weakened currency on Turks.

He also vowed to press on with a low-rates policy that led to the lira’s slide in the first place.

Bitcoin was comparatively quiet, just below $47,000 after trending lower for the past few weeks.

The dollar paused for breath on Thursday, having given up a brief rally made after the U.S Federal Reserve said it would end pandemic-era bond purchases in March, as investors awaited imminent decisions from other major central banks.

Investors are now sitting tight ahead of meetings from the European Central Bank, the Bank of England, and others before firming up their positions at the end of a busy week for central banks.

The dollar index, which measures the currency against six peers, was last at 96.391, having tested last month’s 16-month high of 96.938 after the Fed’s announcement before retreating to as low as 96.296.

On the other side of the dollar sell-off, the euro advanced 0.25% on Wednesday, the pound gained 0.27% and the risk-friendly Australian dollar jumped 1%.

“It suggests to me that markets were positioned for the Fed being more hawkish than survey expectations would have you believe,” said Ray Atrill head of FX strategy at NAB. “Also that risk assets took the latest pivot so well reinforces the fact that the U.S. dollar and risk sentiment seem to be negatively correlated.”

All three main U.S. stock indexes reversed earlier losses and climbed into positive territory after the meeting, extending gains as Fed Chair Jerome Powell struck an upbeat tone in a news conference and expressed willingness to raise interest rates as necessary to control inflation.

“The economy no longer needs increasing amounts of policy support,” said Powell, contrasting the near-depression conditions at the onset of the coronavirus pandemic in 2020 with today’s rising prices and wages and rapid improvement in the job market.

But the Fed was not the only game in town. The ECB, BOE, as well as the Swiss National Bank and Norges Bank will hold policy meetings later Thursday.

“To some extent the reaction to the Fed might have to wait for what the ECB does, because we’re expecting the contrast between the ECB’s disposition and the Fed’s will be laid bare later tonight and that could probably be a catalyst for the U.S. dollar to push through the highs overnight,” Atrill added.

ECB officials are set to call time on the central bank’s Pandemic Emergency Purchase Program but investors will look to see how the six-year old Asset Purchase Program may pick up the slack, though rate rises are a way away.

The euro was last at $1.1282.

The Aussie dollar edged higher to $0.7177 after jobs data came in well above expectations, seemingly more significant for markets than Australia’s top central banker saying he thought it unlikely interest rates will need to rise in 2022.

The pound rested at $1.1326 ahead of a meeting in which the BOE is trying to both hose down inflation and address concerns about an economy already worried about the looming fast-spreading omicron variant of Covid-19.

Data on Wednesday showed UK inflation surged to 5.1% in November, its highest in more than 10 years, the same day the country recorded its highest daily coronavirus cases since the start of the pandemic.

Bitcoin also rallied on Wednesday to $49,000.

The Australian dollar hit its strongest level in a week on Wednesday amid a pick-up in risk appetite on signs omicron may be less severe than other Covid-19 variants, but still vulnerable to existing vaccines.

The Aussie rose to $0.7124 for the first time since Dec. 1, and traded at 80.80 yen, not far from Tuesday’s one-week top at 80.93.

British drugmaker GSK said on Tuesday its antibody-based Covid-19 therapy with U.S. partner Vir Biotechnology is effective against all mutations of the new omicron coronavirus variant.

Meanwhile, the Reserve Bank of Australia said omicron was not expected to derail the country’s economic recovery.

Investors had already cheered comments from the weekend that cases in South Africa — where the omicron strain was first identified — showed milder symptoms, with the top U.S. infectious disease official, Anthony Fauci, adding “it does not look like there’s a great degree of severity” so far.

For the week, Australia’s currency is up 1.71% against the greenback, setting up its best performance in three months. It has rallied 2.28% versus the yen, on track for its best week since mid-October.

“Markets continue to travel with a good deal of optimism that Omicron will not have the severity of prior variants in terms of health outcomes, even if it is more transmissible,” Ray Attrill, head of FX strategy at National Australia Bank, wrote in a client note.

That’s put risk asset markets in “ebullient mood,” lifting stocks, commodities, as well as riskier commodity-linked currencies including the Australian and Canadian dollars, he said.

The Canadian dollar traded at C$1.2645 per greenback, near the two-week high at C$1.2635 set overnight.

The Bank of Canada decides policy later on Wednesday, and while economists expect no change at that meeting, they forecast rate hikes as early as the middle of next year in a recent Reuters poll.

The British pound recovered a bit of composure, consolidating around the middle of this week’s trading range this week at $1.32415.

The euro edged 0.05% higher to $1.12735, after touching its lowest since Nov. 26 at $1.1228 in the previous session.

The dollar index, which measures the greenback against six major peers, was little changed at 96.269, treading water in the middle of its range over the past 2-1/2 weeks.

The JOLTS report on U.S. job openings due later Wednesday should provide further evidence of a tightening labour market, potentially adding fodder for bets on earlier Fed tightening, which could boost the dollar.

Money markets are currently fully priced for a quarter point rate increase by June.