Euro on defensive as Ukraine tension and hawkish Fed support dollar and yen

Banknotes of Saudi riyal, yuan, Turkish lira, pound, US dollar, euro and Jordanian dinar are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic/Illustration

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  • Canadian Dollar Businesses Ahead of Bank of Canada Rate Decision
  • Yuan near four-year high as Beijing tolerates more strength
  • Bitcoin stabilizes near $37,000 after hitting six-month low

TOKYO, Jan 26 (Reuters) – The euro nudged its lowest level in a month against the dollar and the yen on Wednesday, hurt by fears of a possible military conflict in Ukraine and before the Federal Reserve ended a meeting that could herald an acceleration of monetary tightening. .

The Bank of Canada is also expected to announce policy later in the day, and the Canadian dollar saw one of the biggest moves in Asian trade, gaining 0.21% as traders worried about the outcome, chances of a rate hike being well balanced. Read more

The euro slipped 0.07% to $1.12945 after hitting $1.12640 overnight for the first time since Dec. 21. It was little changed at 128.69 yen, after touching 128.25 in the previous session, also a first since December 21.

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Western leaders have stepped up preparations for any Russian military action in Ukraine as Moscow said it watched with grave concern after 8,500 US troops were put on alert to deploy to Europe in the event of an escalation. Read more

Most of the market angst, however, was focused on the Fed as traders awaited clues on the timing and pace of U.S. interest rate hikes, as well as how the central bank will go about it. reduce its balance sheet by nearly $9 trillion, a process dubbed quantitative tightening (QT). Read more

“Market sentiment remains fragile,” TD Securities strategists said, noting that any hint “around QT’s starting point or ‘sooner’ and ‘faster’ upside could move the market.”

But they added that they did not expect definitive signals and the result could be mixed messages.

Money markets are currently pricing in a first hike in March, followed by three more quarter-point hikes by the end of the year.

The dollar index, which measures the currency against six major peers, edged up 0.06% to 96.030, after climbing to 96.273 on Tuesday, its highest level since Jan. 7. It rose as high as 1.74% from a two-month low hit on Jan. 14.

“I think the Fed will recognize that a hike in March is likely, and the key is whether it will signal a faster pace of the hike and also an earlier end to the cut than it has signaled so far. now,” said Shinichiro Kadota, senior FX. strategist at Barclays. “If it turns out to be more hawkish, obviously the dollar will benefit.”

On the simmering tensions around Ukraine, he said: “Until this is resolved, there should be demand for safe-haven currencies, so I think the yen should remain bullish.”

Elsewhere, the pound was little changed at $1.3503 after falling to $1.3436 overnight, its lowest in more than three weeks.

In addition to jitters over Ukraine and the Fed, the pound faces political uncertainty at home, with Prime Minister Boris Johnson under investigation for possible breaches of the COVID-19 lockdown. 19. The findings of an internal investigation could be announced as early as Wednesday, according to media reports. Read more

The Canadian dollar strengthened to C$1.26075 per greenback, recovering from a drop to C$1.2702 earlier in the week, its weakest level since Jan. 7.

“There is enormous uncertainty surrounding the Bank of Canada’s rate announcement in January, as policymakers try to balance the very strong fourth quarter employment and inflation data against the sharp rise in COVID infections and subsequent lockdowns in late December and January,” TD Securities analysts wrote.

“At the end of the day, we think it makes more sense for the Bank of Canada to raise rates.”

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

The Reserve Bank of Australia is meeting next week, and traders are eager to see whether explosive inflation figures released on Tuesday will force Governor Philip Lowe to backtrack on his earlier insistence that rate hikes this year are extremely unlikely. .

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

The yuan hit a nearly four-year high against the dollar as Chinese officials appear to be taking a more tolerant view of currency strength, at least for now.

Ahead of the market open, the People’s Bank of China pegged the midpoint at 6.3246 yuan to the dollar, the firmest since April 2018. The onshore spot yuan strengthened to a high of 6.3201 , also the strongest since April 2018.

In cryptocurrencies, bitcoin strengthened to around $37,200. This is after it hit a low of $32,950.72 at the start of the week – a level seen for the first time since July. Its value has halved from its all-time high of $69,000 in November.

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Reporting by Kevin Buckland; edited by Richard Pullin and Edwina Gibbs

Our standards: The Thomson Reuters Trust Principles.

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