- US Dollar[1] gains for a sixth week but upside strength is easing
- Removal of Omicron risk aversion may bode well for the USD[2]
- EUR/USD[3] likely to resume as the driving force for DXY index
- US inflation data may boost the Greenback on strong data
The US Dollar finished higher for the sixth consecutive week after November’s non-farm payrolls report crossed the wires Friday. However, US Dollar bulls appear to be easing off the gas despite increasingly strong Federal Reserve rate hike bets. Meanwhile, stock market volatility increased last week due to the Omicron variant threat. That likely helped prop up the US Dollar given its safe-haven appeal.
Analyzing movements in the US Dollar DXY index requires an understanding of how the index is compiled. DXY weighs the US Dollar versus a basket of currencies, with the Euro[4], Japanese Yen[5], British Pound[6] and Canadian Dollar[7] weighing at 57.6%, 13.6%, 11.9% and 9.1%, respectively. That said, looking at the individual movements in the respective pairs shows that the US Dollar’s strength has largely stemmed from British Pound weakness last week, with GBP/USD[8] dropping over half a percent on the week.
The Japanese Yen – another safe-haven currency – gained half a percent last week. EUR/USD was nearly unchanged. That movement is revealing yet unsurprising given the risk-off market response to the Omicron variant. This sets up a potential roadmap for DXY's direction in the coming weeks. If scientists assess that Omicron doesn’t pose a more grave threat than the Delta variant, markets may go back into a risk-on stance.
That would likely flip the script for movement in USD/JPY[9] and GBP/USD,
