By Peter Nurse

- The dollar traded higher Monday, boosted by higher U.S. Treasury yields as traders considered Friday’s sharp moves on the discovery of the omicron coronavirus variant as overdone.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 96.310, after dipping to a one-week low of 95.973 on Friday.

USD/JPY rose 0.1% to 113.42, after the yen, which had been the biggest beneficiary of Friday’s flight to quality, surged as much as 2% on Friday, with the pair dropping to 113.05.

EUR/USD fell 0.4% to 1.1271, while GBP/USD dropped 0.1% to 1.3329, off Friday’s 11-month low of 1.3278, while the risk-sensitive AUD/USD rose 0.3% to 0.7147, recovering after a 1% tumble on Friday that saw it dip to 0.7112 for the first time since Aug. 20.

The World Health Organization said on Sunday that it is not yet clear if the new omicron coronavirus variant is more transmissible compared to other variants or if it causes more severe disease.

Health experts from South Africa, where the new variant was first detected, have indicated that the symptoms from the omicron variant have been mild so far, although they also pointed out that their population is relatively young, and that the number of 'breakthrough' infections of vaccinated people was significant.

Vaccine makers have indicated that they will be able to reformulate their drugs in pretty short order, and this has prompted traders to unwind a lot of Friday’s sharp moves, which were all the sharper for taking place on a day when liquidity was thin due to the U.S. holiday weekend.

The benchmark 10-year yield jumped as much as 7 basis points to 1.54%, although it currently trades at 1.52%, having plunged 16 basis points on Friday - the steepest since March 2020. 

Aside from the news surrounding the omicron variant, “the general environment in FX remains quite supportive for the dollar, as the FOMC minutes and a bunch of good data kept market speculation on faster tapering and earlier tightening alive,” said analysts at ING, in a note. “On top of this, the worsening contagion situation in Europe and risk of fresh containment measures are generating further divergence in policy expectations between the ECB and Fed.”

Several officials from the European Central Bank, including President Christine Lagarde, have speaking duties on Monday, and investors will be looking for clues on the central bank’s thinking ahead of its meeting on Dec. 16. ECB board member Isabel Schnabel said the bank expects inflation to peak this month. Preliminary German inflation data for November are due in the course of the morning.

ECB officials are due to receive new forecasts that are likely to show inflation climbing at a higher rate than expected earlier, but they will also have to weigh up the dangers posed by the pandemic following the return of lockdowns to some parts of Europe, as well as the discovery of the new variant.