Ukraine tensions lift US dollar, yuan holds firm

London

THE US dollar rose to a two-week high on Monday (Jan 24) against a basket of currencies, 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 ratcheted up several notches of late, with US President Joe Biden considering boosting military assets in Eastern Europe and ordering diplomats' families to leave Kiev.

ING Bank strategist Francesco Pesole said that markets were pricing more of a risk premium into the euro, with fears increasing that Russia's stand-off 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 was down 0.26 per cent at 1130 GMT to US$1.1313 , while the US dollar index was 0.20 per cent higher at 95.84 .

The euro also lost ground against the safe-haven Swiss franc, falling a quarter per cent to a near seven-year low of 1.0317 .

Another safe-haven currency, the yen , firmed 0.1 per cent to 113.56 per US dollar, a one-month high.

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

The Fed begins 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 plans to shrink its holdings of Treasuries and mortgage debt that have swollen its balance sheet past US$8 trillion.

Most expect the first hike to 0.25 per cent in March and three more to 1 per cent by year-end. .

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

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