Euro edges up, focus on Ukraine talks

By Stefano Rebaudo

(Reuters) -The euro rose on Thursday with investors closely watching for developments in talks between Russia and Ukraine, while the Federal Reserve’s monetary policy decision failed to affect the market as the bar for a hawkish surprise was high.

The Kremlin said that Russia was putting colossal energy into talks on a possible peace deal with Ukraine. Meanwhile, Ukrainian President Volodymyr Zelenskiy has not altered his position that Ukraine’s international borders must be recognised, an adviser said.

The euro was up 0.2% at $1.106, after touching a one-week high of $1.1067 earlier in the session.

“What is important for the foreign exchange market is whether the likelihood of an energy crisis decreases, which would be clearly inflationary and relevant to the exchange rate for many reasons,” Commerzbank analysts said.

“A very fragile peace would perhaps only help moderately in this respect,” they added.

The Russian rouble fell 16% to 105.18 versus the dollar after hitting its highest since Feb. 24 at 88.5 on Wednesday.

According to ING analysts, a Rouble trading below 100 “is a function of a dislocated market”, as currency gains are coming with overnight rouble implied yields at 700%, suggesting offshore names are struggling to get hold of rouble liquidity.

The Fed kicked off its monetary policy tightening with a quarter-percentage-point rate increase on Wednesday, while new projections showed policymakers ready to shift their inflation fight into high gear.

“Considering the very hawkish FOMC meeting, yesterday’s market reaction was not particularly impressive, indicating that investors were already pricing in a rather aggressive hiking cycle,” Unicredit analysts said.

The dollar index, which measures the greenback’s strength against six trading currencies, was 0.2% lower at 98.325 after hitting a one-week low of 98.151. “The U.S. forward curve had already incorporated a heavy degree of tightening before the FOMC meeting, which may slow the intensity of further USD appreciation,” they added.

Japan’s yen eased 0.1% to 118.63, within striking distance of its lowest since February 2016, hit on Wednesday at 119.12 as the Bank of Japan (BoJ) ruled out tightening monetary policy.

Japan is unlikely to see inflation hitting a target of 2%, even accounting for rising energy costs, BoJ Governor Haruhiko Kuroda said, making a case for keeping monetary policy ultra-easy at its policy meeting due on Friday.

The pound weakened against the euro and the dollar after the Bank of England raised interest rates as expected, but softened its language on the need for further increases.

Money markets are currently pricing less than 120 bps of rate hikes by year-end. [IRPR]

The Australian dollar rose 0.6% to 0.7333 versus the greenback after employment sped past expectations in February as activity recovered surprisingly quickly from an Omicron outbreak.

(Reporting by Stefano Rebaudo; Editing by Toby Chopra, Kirsten Donovan)