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Dollar Edges Lower; Australian Dollar Benefits From Risk Appetite

The dollar edged lower Wednesday amid growing risk appetite over indications that the Omicron Covid variant has relatively mild symptoms, and thus won’t derail the global economic recovery.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.2% to 96.205, trading in the middle of its recent range.

GBP/USD edged lower to 1.3238, USD/JPY fell 0.1% to 113.44, while the EUR/USD rose 0.2% to 1.128.

The risk-sensitive AUD/USD edged higher to 0.7118, just below 0.7124, its highest level since Dec. 1, having gained over 1.7% over the last week, its best performance in three months.

The Reserve Bank of Australia left rates at a record low earlier this week, but said the Omicron variant was not expected to derail the country's recovery.

Additionally, USD/CNY fell 0.2% to 6.3538, the yuan hitting hitting its highest level since May 2018, on confidence that the reserve ratio cut announced last week by the central bank will keep the country's economy on track, despite the ongoing real estate crisis.

Helping risk sentiment were various studies that suggest that the Omicron Covid variant, while being highly transmissible, doesn’t have severe medical repercussions.

Additionally, a South African study suggested on Tuesday that booster doses of the Covid-19 vaccine produced by Pfizer (NYSE:PFE), and partner BioNTech (NASDAQ:BNTX), could help fend off Omicron infection, although the study showed the new strain can partially evade protection from two doses.

With concerns just starting to ease over Omicron, attention in foreign exchange markets returns to the central bankers and how they plan to manage the growth versus inflation trade-off.

USD/CAD rose 0.1% to 1.2651 ahead of a Bank of Canada policy meeting later Wednesday. Economists expect the central bank to keep rates unchanged at 0.25%, but it has already ended a bond-buying stimulus program and it could use this meeting to lay the groundwork for an increase in borrowing costs following a strong run of economic data. Brazil's central bank is expected to hike its key rate by a massive 150 basis points at its meeting later.

Poland’s central bank is also expected to lift interest rates at Wednesday’s meeting after a spike in inflation to a two-decade high. USD/PLN fell 0.1% to 4.0587, while EUR/PLN rose 0.2% to 4.5842.

The central bank hiked the benchmark to 1.25% last month, and of the 32 economists surveyed by Bloomberg, 20 expect a 50 basis-point hike to 1.75% later Wednesday, and 10 see the rate rising to 2%. The other two expect a 25 basis-point increase.

The U.S. Federal Reserve, the Bank of England, and the European Central Bank will hand down their policy decisions next week.

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