By Kevin Buckland
(Reuters) – The dollar hovered on Tuesday above the one-week low against major peers it hit last week, as fears eased that the new Omicron coronavirus variant would derail the U.S. recovery and delay Federal Reserve interest rate hikes.
The safe-haven yen stabilised some half a percent off its strongest level since Nov. 11, reached on Monday. The euro meandered about a third of a percent below Monday’s one-week high.
The risk-sensitive Australian dollar drifted about 0.4% from a three-month low.
Traders took comfort from remarks by President Joe Biden that the United States would not reinstate lockdowns, as well as a South African doctor’s comments that the new strain causes milder symptoms.
In testimony prepared for Congress later Tuesday, Fed Chair Jerome Powell says Omicron could cause inflation pressures to last longer.
That would potentially speed the need for rate hikes, whereas traders initially reacted to Omicron’s discovery by pushing back bets for Fed tightening because of the risk to growth.
Money markets currently see good odds of a first rate rise in July, but one is not fully priced until September.
At the same time, the World Health Organization warned of a “very high” risk of infection surges from Omicron, and countries around the world have reacted quickly to tighten border controls.
“A less dire assessment of Omicron has enabled the (dollar index) to clawback some its decline,” but “the somewhat underwhelming bounce in global markets suggests that there is still a heightened level of concern about the Omicron variant,” Westpac strategists wrote in a research note.
Continued strength in the U.S. economy will buoy the greenback, the strategists predict, while the Aussie continues to look weak and a break below $0.7106 “just looks like a matter of time.”
The dollar index, which measures the currency against six major rivals, last traded at 96.203, up from a low of 95.973 from Friday, when it suffered its biggest one-day drop since May.
The greenback added 0.24% to 113.80 yen, after dropping to 112.99 on Monday.
Australia’s dollar edged higher to $0.7146, continuing its recovery form Friday’s low at $0.71125.
The euro was about flat at $1.12955, off Monday’s high at $1.1335.
The single currency had slumped to a nearly 17-month trough of $1.1186 as European Central Bank policy makers stuck to their dovish stance in the face of heated inflation. The latest reading on euro area consumer prices is due later Tuesday.