HONG KONG, Dec 9, Reuters -- This week's rally in risk-friendly assets and currencies like the Australian dollar petered out on Thursday, but the U.S. dollar struggled to regain its lost ground as investors waited for a key Federal Reserve policy meeting next week.
The Aussie dollar was stable at $0.7171, just off Wednesday's week high, while the euro was at $1.1331, after jumping 0.7% on Wednesday to a week high of 1.1335.
MSCI's all-country world index has been back to normal on Tuesday, having had its best day in more than a year, and has gone up further since then.
Markets have been roiled this week by news of the new strain of COVID- 19, which drove investors to safe havens last week, but they have also taken heart from signs that the worst fears may not be realized.
BioNTech and Pfizer said on Wednesday that a three-shot course of their COVID 19 vaccine neutralised the new Omicron variant in a laboratory test showed that booster shots could be a key to protection against infection from the newly identified variant.
Paul Mackel, global head of FX research at HSBC, said that it is very ''virus-on', ''virus-off' in the FX market. The intraday moves are a bit volatile, because of the high headline risk associated with Omicron. The pound dropped to a a year low on Wednesday after British Prime Minister Boris Johnson imposed tougher COVID 19 restrictions in England, ordering people to work from home, wear masks in public places and use vaccine passes.
It was quiet on Thursday after rebounding a bit to last trade at $1.3207.
It's making it harder for market participants to predict how quickly central banks will cut back pandemic-era emergency stimulus and raise interest rates because of the new strain.
The banks' different schedules have been a factor in the development of currency markets in recent weeks. The U.S. Federal Reserve is expected to announce its tapering of its bond-buying programme at its next meeting next week.
The risk of the Fed not announcing a faster taper on December 15 stems mainly from the Omicron variant, according to analysts at Nomura.
The market would quickly reprice in the U.S. Fed tightening, possibly beyond what was originally priced in before the Omicron news, if Omicron-related fears subside, they said.
Expectations of U.S. tapering had helped the dollar index to rise to over a year high in late November, before Omicron's emergence sent it lower.
The Fed's decision could be affected by the CPI inflation data due Friday.
The Bank of Canada held its key overnight interest rate at 0.25%, and maintained its guidance that a first hike could come as soon as April 2022, having gained to its highest level in three weeks ahead of the meeting, along with higher oil prices.
After a long weekend plunge, it fell by 1.3% to less than 50,000 as it continues to trade in a narrow range.