Dollar gains fizzle out as traders reassess risks from Poland

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By Kevin Buckland and Alun John

TOKYO/LONDON (Reuters) - The dollar on Wednesday traded just above multi-month lows against most majors as flows that had supported the safe-haven currency slowed after Joe Biden said a missile that caused an explosion in Poland may not have been fired from Russia. 

NATO-member Poland and Ukraine said on Tuesday the blast that killed two on the Polish side of their border was likely caused by a Russian-made rocket, raising concerns of an escalation in the war.

However, Biden said the weapon was probably not fired by Russia, although the investigation was ongoing.

Russia denies it was responsible for the explosion. NATO ambassadors will hold an emergency meeting on Wednesday with a news conference due around 11.30 GMT.

The euro was last 0.47% higher at $1.0399. It was heading back towards the four-and-a-half month high of $1.0481 it touched a day earlier after U.S. producer price inflation was below expectations, reinforcing bets that last week's cooler-than-expected consumer price inflation was not a one-off.

The European common currency was then knocked off that high, falling as low as $1.028 after news of the explosion in Poland sent traders to the safety of the dollar, which also caused falls in equities. [MKTS/GLOB]

Kim Mundy senior currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) said the euro would take its direction from the dollar and was "susceptible to another fall if there is a ratcheting higher in geopolitical tensions".

"Geopolitical risks continue to hang over currency markets and are likely to remain a key driver of volatility," she said.

Away from geopolitics, slowing U.S. inflation, if sustained, should mean the U.S. Federal Reserve can slow or even pause the aggressive rate hikes that have supported the dollar this year.

British inflation in contrast is continuing to rise, hitting a 41-year high in the 12 months to October, data released on Wednesday showed, though sterling looked beyond this to trade on the day at $1.1871.

Simon Harvey, head of FX analysis at Monex Europe, said the muted reaction was primarily because the CPI data was in line with the BoE’s expectations, but "the overall shift in cross-asset risk conditions due overnight also means focus for GBP traders is outside of UK specific developments".

Britain will announce a new budget on Thursday in which finance minister Jeremy Hunt is expected to announce tax hikes and spending cuts. The pound fell to a record low of $1.0327 in September after Hunt's predecessor Kwasi Kwarteng announced a package of unfunded tax cuts.

The dollar was 0.2% firmer on the Japanese yen at 139.63 influenced by a rise in U.S. long-term Treasury yields during Tokyo trading as haven demand eased, but still near Tuesday's two-and-a-half-month low.

The greenback was also down 0.15% on the Swiss franc at 0.9418, near Tuesday's seven-month low, and the dollar index, which tracks the greenback against six main peers, was 0.24% lower at 106.26.