By Peter Nurse
Investing.com - The U.S. dollar bounced in early European trade Thursday, with this safe haven boosted by reports of hostilities in eastern Ukraine, raising fears of a major conflict.
At 2:55 AM ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 95.900.
Russian-backed rebels earlier Thursday accused Ukrainian government forces of shelling their territory in the eastern part of the country. This has created a lot of uncertainty over whether this will remain a localized event or if it could lead to a broader conflict with Russia using the event as a reason to invade.
Tensions had been reduced earlier in the week after Russia announced it was withdrawing some of its troops positioned near Ukraine, but a number of Western countries, including the U.S., and NATO have disputed that claim.
We have seen "no meaningful pullback" of Russian forces from the border with Ukraine, U.S. Secretary of State Antony Blinken said Wednesday, while being interviewed on television. "On the contrary, we continue to see forces, especially forces that would be in the vanguard of any renewed aggression against Ukraine, continuing to be at the border, to mass at the border."
EUR/USD fell 0.1% to 1.1366, having jumped 0.5% the day before, USD/JPY fell 0.2% to 115.28, with the safe haven yen in demand. GBP/USD edged higher to 1.3588, while the risk sensitive AUD/USD was largely flat at 0.7194, having earlier fallen as much as 0.6%.
The Russian ruble, which has been sensitive to the prospect of war as sanctions loom, weakened, with USD/RUB up 0.7% at 75.8008.
“A diplomatic solution remains our base case (albeit arguably still a close call), and we expect the geopolitical risk premium to fade with time,” said analysts at ING, in a note. “The timing for that is however highly uncertain, and pro-cyclical FX gains could remain moderate in the near term.”
Elsewhere, traders continue to digest the minutes from the most recent Federal Reserve meeting, ahead of the release of the weekly jobless claims data.
With consumer inflation at 40-year highs, expectations had been growing that the Fed policymakers had already decided to start its policy tightening with a 50 basis point hike at its March meeting.
However, the minutes showed that while policymakers agreed that it would "soon be appropriate" to raise the Fed's benchmark overnight interest rate from its near-zero level, they would re-assess the rate hike timeline at each meeting depending on the available data.
USD/TRY rose 0.2% to 13.6160, with Turkey’s central bank widely expected to hold interest rates unchanged for a second consecutive meeting later Thursday, as inflation surges.
The benchmark one-week repo rate is expected to stay at 14%, with President Recep Tayyip Erdoğan opposed to higher interest rates despite this being the orthodox method of combating soaring consumer prices.