Euro jumps after Ukraine offers neutral status, yen rebounds

By Stefano Rebaudo

(Reuters) -The euro jumped on Tuesday after some progress was reported in peace talks between Russia and Ukraine.

Russia promised at the talks in Istanbul to drastically scale down its military operations around Kyiv and the northern Ukrainian city of Chernihiv, while Ukraine proposed neutral status with international guarantees.

The U.S. dollar was lower, while the yen staged a modest rebound after tumbling on Monday to its lowest level since August 2015.

Any step toward a ceasefire or potential peace deal in Ukraine would support the common currency as the euro area is seen suffering a significant economic blow from the conflict, which began with Russia’s invasion on Feb. 24.

The euro was up 1.3% at $1.1125, at its highest since March 18.

“Unless there is positive news from the negotiations between Ukraine and Russia, EUR will continue to struggle climbing back above the 1.10-mark against USD on a sustainable basis,” You-Na Park-Heger, foreign exchange analyst at Commerzbank, said in a research note to clients.

Versus a basket of currencies, the dollar was down 0.6% at 98.470, but not far from its highest level since May 2020 at 99.415.

“Our view on the greenback remains positive due to the Federal Reserve’s hawkish stance,” Roberto Mialich, forex strategist at Unicredit, said.

The U.S. dollar fell 0.9% to 122.7 against the yen after rising to its highest level since 2015 on Monday. It is set for its biggest monthly rise since November 2016.

The chart below shows monthly percentage changes of the dollar/yen exchange rate.

MONETARY POLICY DIVERGENCE

Japanese Finance Minister Shunichi Suzuki said the government would closely watch currency moves to prevent a “bad” weak yen that hurts the economy.

“While the comments from Japanese officials overnight are unlikely to reverse the yen weakening trend on their own, they should at least help to slow the recent fast pace of yen selling,” Lee Hardman, currency and emerging market analyst at MUFG, said in a note to clients.

The Bank of Japan on Tuesday kept up its relentless quest to defend a key yield cap by offering to buy unlimited amounts of 10-year government bonds, putting even more downward pressure on the yen.

“The divergence between the U.S. and Japan’s monetary policy will continue to weigh on the yen, which we expect to stabilize at around 125 versus the dollar and probably even beyond that level,” Unicredit’s Mialich argued.

The Swedish crown rallied recently as the spread between German and Swedish 10-year yields rose to 62 bps from 36 bps in mid-March.

China’s offshore yuan rose 0.2% to 6.3738 against the greenback after new pandemic restrictions in Shanghai. It hit its lowest since October 2021 at 6.4106 in mid-March.

Shanghai, China’s most populous city, tightened the first phase of a two-stage COVID-19 lockdown, asking residents to stay indoors.

Bitcoin was flat at $48,013 after hitting its highest since early January on Monday.

Ether, the world’s second-largest cryptocurrency, was up 4.4% at $3,480.

(Reporting by Stefano Rebaudo; Editing by Ed Osmond, Gareth Jones and Jan Harvey)