Dollar slips as investors become less concerned about Ukraine

The euro held on to overnight gains in early Asian trade on Wednesday having jumped on reports that some Russian forces had moved away from the Ukraine border, though, with tensions still elevated, the common currency failed to make further progress.

The U.S. dollar edged slightly lower on Wednesday as investors became less worried about the risk of Russia invading Ukraine and waited for the release of minutes from the U.S. Federal Reserves January meeting.

Equity markets rallied on Tuesday after Russia said it would withdraw some troops from Ukraines border. This risk-on tone continued through the Asian session on Wednesday, even though U.S. President Joe Biden warned that more than 150,000 Russian troops were still in a “threatening position”.

Ukraine said the online networks of its defence ministry and two banks were hit by a cyber attack.

In currency markets, the moves were small. The U.S. dollar index edged lower and was down 0.2% on the day at 95.846 by 0831 GMT.

“More optimism around a diplomatic solution in Ukraine may keep applying some pressure on the dollar and the other low-yielders today,” wrote ING FX strategists in a note to clients.

“Given the magnified impact on crude, CAD and NOK should keep struggling to fully cash in on improved geopolitical sentiment,” they added, referring to the Canadian dollar and Norwegian crown.

Long-standing expectations that the U.S. Federal Reserve will raise rates provided a reason for the dollars losses to be limited.

Markets are pricing in a 59.5% chance of a 50 basis points hike at the Feds next meeting on March 16 and a 40.5% chance of a 25 bps hike.

The minutes from the Feds January meeting will be released later in the session.

We would guess the minutes turn out to be ‘dovish’ – not because they are actually dovish but because it would be hard to out-hawk market expectations at the moment, and we seem primed for a further feel-good risk rally, but will wait to see, wrote Elsa Lignos, global head of FX strategy at RBC Capital Markets, in a client note.

As oil prices recovered, the Canadian dollar strengthened slightly against the U.S. dollar but the Norwegian crown was a touch lower on the day.

The Australian dollar, which is seen as a proxy for risk appetite, was up 0.3% at $0.7173 while the New Zealand dollar was also slightly higher on the day.

The safe-haven yen was a touch lower versus the dollar, at 115.770.

The British pound was up 0.1% against the dollar at $1.35565 but steady versus the euro, after data showing UK inflation hit a nearly 30-year high of 5.5%.

The Bank of England has already raised interest rates twice since December and financial markets expect a further rate rise on March 17 after the BoEs next meeting.

The euro edged higher, up 0.2% on the day at $1.13825.

In cryptocurrencies, bitcoin was little changed, down 0.7% at $44,276.

(Reporting by Elizabeth Howcroft; Editing by David Holmes)