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Dollar Weakens Against Yen on New Virus Fears; Rand Hit Hard

The dollar edged lower Friday, weighed by gains to the safe haven yen and Swiss franc, as traders dumped riskier currencies in the wake of the discovery of a new highly-mutated coronavirus variant.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 96.635, moving further away from Wednesday's high of 96.938, the strongest level since July 2020.

USD/JPY fell 0.7% to 114.52 and USD/CHF dropped 0.6% to 0.9307 as traders leapt into the traditional safe havens of the Japanese yen and the Swiss franc on the announcement of a new Covid-19 variant that had mutated so far from the original strain that it could be resistant to vaccines.

Elsewhere, EUR/USD rose 0.3% to 1.1240 and GBP/USD dropped 0.2% to 1.3300.

The World Health Organisation announced that it will hold an emergency meeting later Friday to discuss the implications for treatments in the wake of this discovery. While it isn't yet clear how virulent the new strain is, it is the first strain that has shown itself to be competitive with the Delta variant that has been responsible for most infections this year.

The U.K. Health Security Agency said that the variant, called B.1.1.529 or nu, has a spike protein that was dramatically different from the one in the original coronavirus, which the current generation of Covid-19 vaccines are designed to fight.

Although the dollar moved lower, the hardest hit currency was the South African rand as the variant was first detected in southern Africa, with USD/ZAR climbing 1.6% to 16.2171, a more than one-year high.

Also whacked was the risk sensitive Australian dollar, with AUD/USD falling to a three-month low, down 0.8% at 0.7130, even as Australian retail sales grew a better-than-expected 4.9% month-on-month in October. The New Zealand dollar followed suit, falling 0.7% to 0.6811, also a three-month low.

"People are reacting with the uncertainty about what this means. You shoot first and ask questions later when this sort of news erupts," Reuters reported Ray Attrill, Head of FX Strategy at NAB in Sydney, as saying.

That said, the U.S. dollar index is still up around 0.6% on the week and is set for its fifth straight weekly gain. Traders are positioning for the Federal Reserve to start raising interest rates by the middle of next year, while central banks in Europe, Japan and elsewhere stick to more dovish stances.

ECB President Christine Lagarde is set to speak later in the session, and she rowed back last week on the notion of early rate hikes in the Eurozone. Additionally, the minutes of the central bank’s last meeting suggested a cautious approach to any policy changes.

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