Forex: Risk-on boost from potential Biden-Putin summit fades

LONDON (Reuters) - The risk-on sentiment that had lifted the euro and weighed on the dollar gradually faded on Monday after the Kremlin said there were no concrete plans for a summit over Ukraine between the Russian and U.S. presidents.

Reports that Vladimir Putin and Joe Biden had agreed in principle to discuss finding a possible path out of Europe's biggest military crisis in decades had prompted investors to pull capital away from safe havens.

But tensions nevertheless continued to run high.

Russia's FSB security service said a shell fired from Ukrainian territory had destroyed a border guard post, while Ukrainian authorities warned that hackers were preparing to launch major attacks on government agencies, banks and the defence sector on Tuesday.

"The optimism has dissipated," said Jeremy Stretch, head of G10 FX strategy at CIBC, pointing to fresh news headlines suggesting that Britain believes Russia may still be planning an invasion.

Asked whether he believed markets were being cautiously optimistic, Stretch said there was in fact little optimism going around.

"Caution is the order of the day", he said.

The euro which was gaining close to 0.6% at one stage during morning trading, slowly abandoned those gains and was up a meagre 0.13% at $1.1334 as of 1224 GMT.

The common currency also benefited form data showing the euro zone's economic recovery regaining momentum as an easing of coronavirus restrictions boosts the bloc's dominant service industry.

During the same time, the dollar index recovered most of its losses and was down only 0.13% against major rival currencies.

Echoing the mood swing over the prospects of a de-escalation, European stock markets turned sharply negative after opening in positive territory.

By contrast, safe-have currencies which have benefited from the tensions spurred by Russia's military build-up on Ukraine's borders were back in favour.

The Swiss franc added 0.54% at $0.9164.

Bitcoin which was on a recovery path from a mild bruising over the weekend went on a downward path again.

The world's largest cryptocurrency was down about 6% and trading at about $37,500, its lowest point since Feb. 4.

While the outcome of negotiations to find a peaceful way out of the Ukrainian crisis remains uncertain, more volatility is expected ahead.

Currency markets participants are also focused on central bank policy, seeking clues on the speed and size of interest rate hikes in major markets.

Investors will be closely watching remarks from U.S. Federal Reserve policy makers this week for any hint that an expected rate hike at the Fed's March meeting could veer more towards to 50 basis points instead of the current consensus for a 25 basis point increase.

 

(Reporting by Julien Ponthus and Alun John; Editing by Stephen Coates, Edwina Gibbs, Peter Graff and Hugh Lawson)