Dollar near two-week high amid jitters over hawkish Fed, Ukraine tensions

© Reuters. FILE PHOTO: Pound and U.S. dollar bills are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

By Kevin Buckland

TOKYO (Reuters) - The safe-haven U.S. dollar hovered near a two-week high against its major peers on Tuesday amid escalating worries about both a faster pace of Federal Reserve policy tightening and potential military conflict in Ukraine.

The Australian dollar rose briefly after strong consumer price numbers boosted the case for a Reserve Bank interest rate increase this year.

The Fed begins a two-day policy meeting later in the global day, and investors will be anxious for any hints on the timing and pace of rate hikes, as well as about how fast the central bank will shrink its more-than $8 trillion holdings of Treasuries and mortgage debt.

Money markets are priced for a first rate hike in March, with three more quarter-point increases by year-end.

The dollar index, which measures the greenback against six major peers, edged up slightly to 95.920, after climbing as high as 96.135 overnight for the first time since Jan. 10.

"The case for the Fed potentially following up a March rate rise before the June meeting - even as early as April - is a very compelling one, and there is a risk that the market will still have to reprice," said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY) in Sydney.

"The geopolitical risk has just added a new layer of safe haven support."

Markets until recently had mostly shrugged off the massing of Russian troops on Ukraine's borders, but tensions have ratcheted up lately. NATO said it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets, in what Russia denounced as an escalation of tensions.

ING Bank strategist Francesco Pesole said markets were pricing more of a risk premium into the euro, with fears increasing that Russia's stand-off over Ukraine with the West could prompt Moscow to curb energy supplies to Europe.

The euro slipped 0.08% to $1.1323, leaving it near the middle of its range of the past week. Overnight it fell as low as $1.1291 for the first time since Jan. 10.

The dollar eased slightly to 113.87 versus fellow safe haven the yen, after recovering from a one-month low of 113.47 touched in the previous session.

The Aussie traded 0.09% higher at $0.7150 after briefly climbing as much as 0.45% as a key inflation gauge jumped to a 7 1/2-year peak.

Many analysts contend that such a pace will force the RBA into a rate hike this year, despite Governor Philip Lowe previously maintaining that such an eventuality was extremely unlikely.

Money markets have long been at odds with the RBA's dovish stance, and are priced for a rate hike by June.

"The numbers are clearly well above the RBA's own forecasts for inflation, so the chances they will have to capitulate on their previous guidance are rising by the day," said NAB's Attrill.

At the same, "the numbers simply validated the position of the money markets," he said, adding that explained why the Aussie didn't have a sustained rally.

Cryptocurrencies traded weaker, but were well off the lows tested at the start of the week. Bitcoin changed hands at close to $36,500, after dipping below $33,000 on Monday for the first time in six months. It has halved in value since touching a record $69,000 in November.

Smaller rival ether last traded around $2,440, following its dive to a six-month low of $2,160.

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Currency bid prices at 0114 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.1323 $1.1333 -0.08% -0.40% +1.1328 +1.1318

Dollar/Yen

113.8700 113.9400 -0.05% -0.99% +114.0850 +113.8800

Euro/Yen

128.92 129.07 -0.12% -1.07% +129.1900 +128.9400

Dollar/Swiss

0.9141 0.9141 +0.02% +0.23% +0.9145 +0.9142

Sterling/Dollar

1.3477 1.3491 -0.11% -0.35% +1.3489 +1.3476

Dollar/Canadian

1.2643 1.2637 +0.02% -0.04% +1.2644 +1.2621

Aussie/Dollar

0.7150 0.7146 +0.09% -1.61% +0.7174 +0.7142

NZ

Dollar/Dollar 0.6689 0.6700 -0.13% -2.24% +0.6707 +0.6692

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ