U.S. dollar hit new high while Euro and Canadian dollar fell

 The U.S. dollar rallied on Monday. It traded close to a 16-month high against the euro due to growing anxiety over the impact of soaring coronavirus infections in Europe. Austria announced that it’s reimposing a full lockdown, while Germany is considering following suit.

 The dollar remained near its strongest level since early October versus the riskier Canadian and Australian dollars. A slump in crude oil pressured the commodity-linked currencies, pushing them in the red. Furthermore, Federal Reserve officials Christopher Waller and Richard Clarida made bullish comments on Friday, suggesting a faster pace of stimulus tapering may be appropriate amid heated inflation and quickening recovery. Their statements gave the greenback additional support. 

According to the analysts, a more rapid end to tapering may cause earlier interest rate increases, as well. Currently, the forex market sides the bets that the Federal Open Market Committee (FOMC) will start hiking rates by the middle of 2022. 

On Monday, the dollar index traded little changed at 96.148 against the basket of six major currencies, remaining near the last week’s 16-month high of 96.266.

How did the Euro fare?

The common currency tumbled down by 0.25% to $1.12705, exchanging hands in the sight of the 16-month low reached on Friday. Chris Weston, the head of research at brokerage Pepperstone in Melbourne, noted that the EUR/USD pair has been in free-fall. It will probably get the lion’s share of attention from traders looking for a play on growing restrictions and tensions across the eurozone. He also added that short EUR remains attractive for tactical traders and trend followers. 

Europe has become the epicenter of the Covid-19 pandemic. It accounts for half of global cases and deaths. Germany’s Health Minister Jens Spahn stated that the fourth wave of infections had pushed the country into a national emergency. He warned that vaccinations alone would not cut case numbers.

 Meanwhile, Austria became the first country in western Europe, which reimpose a full coronavirus lockdown from Monday. Investors are concerned that a slowdown in Europe may hit energy demand. Such worries dented crude oil, which had already traded in the red over the prospect of a U.S.-led release of emergency stockpiles.

 As a result, the oil-linked currencies struggled on Monday. The dollar gained 0.10% against the Canadian loonie, trading at C$1.2640 at last. It closed in on Friday’s peak at C$1.2663, the highest level since October 1.

What about the Australian dollar?

The Aussie dollar managed to climb up by 0.22% to $0.72525 after decreasing earlier in the session. A surge in iron ore prices supported the currency. But before that, it had plummeted down to $0.72275 for the first time since October 6. 

Joseph Capurso, a strategist at Commonwealth Bank of Australia, noted that he expects the Aussie to remain heavy in the near term. It may decline to $0.70, considering the impact of the Reserve Bank of Australia’s dovish policy stance and a slowing Chinese economy. These factors will likely pressure the currency.

 Capurso also thinks that the USD has the potential to extend its recent rally this week. It may even set a fresh 2021 high. Moreover, another round of strong U.S. inflation could further propel forex market pricing of the USD and FOMC rate hikes.

 Policymakers announced the start of tapering the FOMC’s meeting at the start of this month. The minutes of this meeting are due Wednesday. They may provide more insight on how many Fed officials are considering earlier rate increases or faster tapering.

 In addition, traders are waiting for U.S. President Joe Biden to announce his nominee for Fed chair this week. He will interview incumbent Jerome Powell and Fed governor Lael Brainard at first, though. Westpac strategists stated that governor Brainard is more dovish. Thus, her nomination could prompt some kneejerking greenback selling. 

How did the Yen and EM currencies trade?

 The dollar soared by 0.1% against the safe-haven Japanese yen on Monday. It traded at 114.15 yen per USD, remaining in the middle of a range seen over the past week and a half.

 In Asia, EM currencies remained weak on Monday. Hawkish comments from several U.S. central bankers weighed on sentiment while growing anxiety over soaring covid infections in Europe also prompted traders to move on safe havens. The Chinese yuan was firm. It managed to stabilize several regional currencies. However, the Thai baht tumbled down by 0.4% on Monday. The Indonesian rupiah and the Philippine peso also declined by 0.1% and 0.3%, respectively.