Ukraine tensions lift dollar, yuan holds firm

The dollar inched higher on Monday, moving further off its recent two-month lows, lifted by the tension between Russia and the West over Ukraine and the possibility of a more hawkish stance from the Federal Reserve this week

Markets were until recently not fretting about the massing of Russian troops on Ukraine’s borders, but tensions have tightened several notches of late, with U.S. President Joe Biden considering boosting military assets in Eastern Europe and ordering diplomats’ families to leave Kyiv

ING Bank strategist Francesco Pesole said markets were pricing more of a risk premium into the euro, with fears worsening that Russia’s standoff with the West could prompt it to curb energy supplies to Europe

Meanwhile, the IHS Markit Flash Composite Purchasing Managers’ Index for the euro zone, a gauge of economic health, dropped in January to its lowest since last February

The euro slipped 0.15% to $1.1325, trading just off two-week lows touched on Friday , while the dollar index was 0.10% higher at 95.72

The greenback also gained 0.1% on the safe-haven yen with a dollar worth 113.8 yen, though the Japanese currency was still near its recent top of 113.47

The dollar index has gained some 1.3% off since Jan. 14. During this period, several banks have upped forecasts for the speed and size of policy tightening by the U.S. Federal Reserve

The Fed starts a two-day meeting on Tuesday and may signal the start of interest rate rises from March while indicating how fast it will move with reducing the size of its balance sheet

Most expect the first hike to 0.25% in March and three more to 1.0% by year end

However, positioning data showed on Friday speculators cut net long positioning on the dollar to the lowest since September and instead added $2.6 billion worth of net positions

ING’s Pesole said leaving aside the Ukraine situation, the dollar recovery could stall if the Fed signalled an implicit preference for balance sheet reduction as a means to tighten policy

“If markets see the Fed willing to let balance sheet reduction do the heavy lifting, that may force a scaleback in forecasts for the number of rate hikes,” he said

“The dollar will find more support from actual rate hike expectations than expectations of draining liquidity out of the market

The Australian dollar meanwhile slipped 0.25% to two-week lows of A$0.71.52 against the greenback, ahead of Tuesday data that may show core inflation at 2.4%, the fastest rate of price growth since 2014

The one currency to hold firm against the dollar was the Chinese yuan, which rose 0.2% to the highest since May 2018 at 6.328

Finally, Bitcoin which has almost halved in value since touching a $69,000 record in November, looked at risk of falling under $34,000 for the first time since last July