After a bout of profit-taking in the previous session, the U.S. dollar bounced back on Tuesday, despite the fact that improving risk sentiment boosted riskier currencies such as the Australian dollar and the British pound.
The U.S. Dollar Currency Index was near zero on the day, at 96.53, after slipping as low as 96.336 earlier in the session. The index, which is up about 7% for the year, fell by 0.1% on Monday as traders sold the dollar to book profits in the final days of the year.
Risk appetite took a blow on Monday after the U.S. took a hit. Senator Joe Manchin, a conservative Democrat who is key to President Joe Biden's hopes of passing a $1.75 trillion domestic investment bill - known as Build Back Better - said on Sunday he would not support the package, leading to a sell-off in global markets.
Surging Omicron coronaviruses cases has pushed investors to look for safe havens such as the Japanese yen and the Swiss franc. On Tuesday, the bond yields of the CHF stock rebounded as investors looked past the recent setbacks.
Shaun Osborne, chief FX strategist at Scotiabank, said in a note that they expect a broader range of trading over the holiday period.
The risk-sensitive Australian dollar bounced back on Tuesday, snapping a two-day weakening streak to trade up 0.37%.
The British pound went up against the dollar and euro, even as British Prime Minister Boris Johnson cautioned that further measures may be needed to tackle the spread of the disease, even though the rebound in global risk appetite pushed it up against the dollar and euro.
The dollar index is close to the 16 month high of 96.938 hit in late November, despite the lackluster showing this week. With the latest positioning data near the highest levels in more than two years, investors are bullish about the outlook for the greenback.
The Federal Reserve's hawkish statement last week, which said it would accelerate the unwind of its asset purchases, paving the way for three quarter-percentage rate increases in 2022, is expected to keep the dollar well-supported.
As investors bank on tighter monetary policy being introduced by the Fed and Bank of Canada in the new year, we continue to predict the USD and CAD advancing against the majors, Osborne said.
The Bank of Canada's governor said on Wednesday that the central bank is about to hike rates in Canada's economy because of the coronaviruses, which has slack in Canada's economy.
The loonie was up about 0.1% on Tuesday.
In other trading, Turkey's lira was up about 4% against the U.S. dollar, extending its historic recovery from record lows after President Tayyip Erdogan unveiled a plan that would guarantee local currency deposits against market fluctuations.
After falling for the past few weeks, the price of virtual currency has gained 4% to $48,700.