Euro on defensive as traders fret over Ukraine tension, hawkish Fed

By Kevin Buckland

TOKYO (Reuters) - The euro hovered near its weakest in a month versus the safe-haven dollar and yen on Wednesday as traders fretted over a potential military conflict in Ukraine and the possibility of accelerated Federal Reserve policy tightening.

The euro was about flat at $1.1303 after dipping to $1.1264 overnight for the first time since Dec. 21. It slipped 0.06% to 128.64 yen, after touching 128.25 in the previous session, also a first since Dec. 21.

Western leaders stepped up preparations for any Russian military action in Ukraine while Moscow said it was watching with great concern after 8,500 U.S. troops were put on alert to deploy to Europe in the event of an escalation.

Meanwhile, the Fed ends a two-day policy meeting later in the global day, with market players anxiously awaiting further clues on the timing and pace of interest rate hikes, as well as how the central bank will go about slimming down its almost $9 trillion balance sheet, a process dubbed quantitative tightening (QT).

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

The dollar index, which measures the currency against six major peers, was flat at 95.973, after climbing to 96.273 on Tuesday, the highest since Jan. 7. It has climbed as much as 1.74% from a two-month low touched on Jan. 14.

"Market sentiment remains fragile," TD Securities strategists wrote in a client note.

From the Fed, "any hints around the starting point for QT or 'sooner' and 'faster' on hikes could be market-moving," but "we don't expect definitive signals, unfortunately, and the result could be mixed messages," they wrote.

Elsewhere, sterling was little changed at $1.35095 after dipping to a more than three-week low of $1.3436 overnight. In addition to jitters over Ukraine and the Fed, sterling is contending with political uncertainty at home, with Prime Minister Boris Johnson under investigation for possible COVID-19 lockdown breaches.

The findings of an internal inquiry could be announced as soon as Wednesday, according to media reports.

The Canadian dollar edged up to CAD$1.2622 per greenback ahead of a Bank of Canada policy decision later in the day. The currency has recovered after dropping to CAD$1.2702 at the start of the week for the first time since Jan. 7.

"There is a huge amount of uncertainty around the January Bank of Canada rate announcement, as policymakers attempt to balance very strong realized data on employment and inflation from Q4 versus the sharp increase in COVID infections and subsequent lockdowns in late December and January," TD Securities analysts wrote.

The risk-sensitive Australian dollar was little changed at $0.71555, consolidating after sliding to a one-month low of $0.70905 on Monday.

The Reserve Bank of Australia meets next week, and traders are anxious to see if blowout inflation numbers released Tuesday force Governor Philip Lowe to backtrack on his previous insistence that rate hikes this year are extremely unlikely.

Australian stock and bond markets are shut on Wednesday for a holiday.

 

(Reporting by Kevin Buckland; editing by Richard Pullin)