Just a few days after the Omicron variety appeared, currency markets immediately no longer fully value the Federal Reserve's 25- basis point interest rate increase in June 2022. At the same time, the 10-point increase from the European Central Bank (ECB) at the end of 2022 is also shaking.
The likelihood of the Bank of England raising interest rates next month is around 53%, down from 75% on Thursday.
The negative move comes amid the discovery of a new COVID-19 variant in South Africa. Some governments have activated tighter border control while waiting for scientists to find out whether the breakthrough is vaccine-resistant.
The panic that engulfed the market during the COVID-19 pandemic early last year has left clear consequences. Oil prices fell more than 6%, tourism stocks recorded at least 6% declines and US Treasury bond yields for 2 years fell by 12 basis points from March 2020.
Many currency traders are favoring the US Dollar and other currencies thanks to the prospect of a strong interest rate increase. According to them, the potential of these currencies comes from higher inflation and better resilience of economies.
The US Dollar Index has reached its highest level in 17 months after President Joe Biden nominated Jerome Powell to continue as Fed Chairman for a second term. In addition, the minutes of the Fed's FOMC meeting in early November showed many policymakers are ready to accelerate the reduction of asset purchases and increase interest rates.
The valuations of the Yen, the Swiss francs and the Euro are falling, reflecting the view that tightening policies for these countries is still far-off.
"If the new COVID-19 variation has truly disrupted the Fed's policy, the Dollar could be more vulnerable to the Euro. We have talked about the Fed raising interest rates twice next year," said Francesco Pesole, a strategist at ING Bank.
The new vulnerability could also be a hur hurdle for central banks if it exacerbates the supply chain's delays, which are a cause of inflation.
The UK, where inflation has reached its highest level in the past 10 years, has had a policy tightening price of about 70 basis points in mid-2022, despite a lackluster economic recovery.
The British pound fell 0.6% against the Euro on Friday. Analysts at financial company MUFG predict that along with the Australian Kiwi and the Canadian Dollar, the British pound will be most vulnerable to exchange rate easing.
The ECB is expected to cut its pandemic emergency stimulus plan by 1.85 trillion Euros ($2.08 trillion). Peter McCallum, a strategist at Mizuho, sees a better chance of extending the program beyond the March deadline.
