Dollar edges higher on geopolitical tensions ahead of the Fed's policy meet

As investors bought safe-haven currencies amid tensions between Russia and the West over Ukraine, the dollar edged higher on Tuesday to within striking distance of its two-week peak.

By Stefano Rebaudo

(Reuters) - The dollar edged higher on Tuesday to within striking distance of its two-week peak, as investors bought safe-haven currencies amid tensions between Russia and the West over Ukraine while awaiting the outcome of the Federal Reserve's policy meeting.

The U.S. military put about 8,500 troops on alert to be ready to deploy to Europe if needed, in the latest effort to reassure jittery NATO allies in the face of a Russian military build-up near Ukraine.

"Much greater exposure of European economies to the crisis does not make the euro a particularly attractive vehicle to ride out the current storm," ING analysts said.

The euro was down 0.2% at 0848 GMT to $1.1300, trading just off its lowest since Dec. 20 touched on Monday.

The dollar index was 0.1% higher at 96.02, just off its two-week high of 96.135 hit on Monday.

The safe-haven yen gained 0.3% versus the euro and 0.1% against the dollar, remaining within striking distance of its one-month highs.

The Swiss Franc was down 0.1% versus the euro at 1.0366, but not far from its highest since 2015, hit recently at 1.0298.

The Fed could firm up plans to raise rates and shrink its holdings of U.S. Treasury bonds and mortgage-backed securities that have swollen its balance sheet past $8 trillion at its meeting that ends on Wednesday.

Analyst views about the meeting are mixed, with Deutsche Bank flagging a potentially hawkish surprise over the months ahead, with the possibility the Fed raises rates in March and increases them as many as six or seven times this year.

But ING analysts say that if the Fed's balance sheet reduction does the heavy lifting of policy normalisation, that could scale back forecasts for the number of rate hikes.

According to Commerzbank, "the markets are likely to remain nervous in the run-up to tomorrow's meeting, but we do not expect any new insights."

Money markets are pricing an 85% chance of a 25 basis point Fed hike in March and three more to 1.0% by year-end. [IRPR]

Bitcoin, which has almost halved in value since touching a $69,000 record in November, lost 2% to trade around $36,089. Meanwhile, ether, the world's second-largest cryptocurrency, was down 2.7% at $2,377.

 

(Reporting by Stefano Rebaudo Editing by Mark Potter)