Euro at one-month high vs dollar on hopes over Ukraine talks

By John McCrank and Elizabeth Howcroft

NEW YORK (Reuters) – The dollar dropped on Wednesday, with the safe-haven currency hitting a nearly two-week low, while the euro rose on cautious optimism over peace talks between Russia and Ukraine.

The dollar index, which measures the greenback against a basket of six peer currencies, was down 0.596% at 98.496 at 10:30 Eastern Daylight Time, having earlier touched its lowest level since March 17.

The euro rallied against the dollar to hit its highest since March 1, up 0.81% at 1.1076..

The moves came as investors adjusted their defensive bets following Russia’s promise during peace talks on Tuesday to reduce its attack on Kyiv.

The developments in the talks marked “a surprising and important shift in tone … suggesting that the conflict may be moving to a more localized phase with some of the more extreme tail risk scenarios reducing in probability,” analysts from JPMorgan said in a note to clients.

Together with developments including surging inflation in Europe, the shift prompted the analysts at JPMorgan to recommend buying EUR/USD again.

The United States, however, warned it had not seen “signs of real seriousness” from Russia, which invaded Ukraine on Feb. 24, in pursuing peace.

The risk-sensitive Australian and New Zealand dollars were mixed, with the Aussie down 0.05% at $0.74895 and the Kiwi up 0.38% at $0.69225.

“Markets appear to have taken an optimistic stance well before peace talks have yielded any result,” ING FX strategists wrote in a note to clients.

“The FX market may be increasingly detached from trading the Russia-Ukraine situation and start to catch up with the wide moves in rate and growth differentials, all of which point to a stronger dollar.”

Aside from its safe-haven status, the dollar has drawn strength from investor expectations the U.S. Federal Reserve, which raised rates by 25 basis points at its March 16 meeting, will be more hawkish than the European Central Bank.

In Europe, data and policymakers’ warnings highlighted stalling growth, plummeting confidence and soaring inflation as the European economy feels the impact of the war in Ukraine.

Spain’s flash CPI data for March showed prices rising at their fastest since May 1985. But ECB President Christine Lagarde said food and energy prices should stop increasing, helping the euro zone avoid the combination of stagnant growth and high inflation feared by economists.

The German government’s council of economic advisers cut its growth forecast for Europe’s largest economy, citing economic uncertainty following Russia’s invasion of Ukraine.

Elsewhere, the yen recovered further from its seven-year low hit on Monday, after a meeting between Bank of Japan (BOJ) Governor Haruhiko Kuroda and Prime Minister Fumio Kishida added to speculation about the level of official discomfort with a falling yen.

The yen was up 0.89% against the dollar at 122.83.

(Reporting by John McCrank in New York and Elizabeth Howcroft in London; Editing by Robert Birsel; Editing by Kirsten Donovan and Barbara Lewis)