U.S. dollar declines as Russia-Ukraine tensions wane

The U.S. dollar plummeted down for a second consecutive day on Wednesday as traders became less worried about the risk of Russia invading Ukraine. They awaited the release of minutes from the U.S. Federal Reserve’s January meeting. Meanwhile, European equity markets remained mixed after rallying on Tuesday. Russia announced that it would withdraw some troops from Ukraine’s border. This statement lessened the global tensions.

According to U.S. President Joe Biden, more than 150,000 Russian troops were still in a threatening position. NATO wants Moscow to prove it was pulling back. Ukraine also stated that the online networks of its defense ministry and two banks were hit by a cyberattack recently.

In forex markets, the moves were small. The U.S. dollar index dropped by 0.2% on the day, trading at 95.847 at last. ING FX strategists noted that more optimism around a diplomatic solution in Ukraine might keep applying some pressure on the greenback and the other low-yielder currencies today. They also added that given the magnified impact on crude, NOK and CAD should keep struggling to fully cash in on improved geopolitical sentiment, referring to the Norwegian crown and Canadian dollar.

Investors’ long-standing expectations that the U.S. Federal Reserve would raise rates provided a reason for the greenback’s limited losses. The currency could fare much worse. Markets are currently pricing in a 57.5% chance of a 50 basis points hike at the Federal Reserve’s next meeting on March 16, along with a 42.5% chance of a 25 bps hike.

Elsa Lignos, the global head of F.X. strategy at RBC Capital Markets, stated that the minutes might turn out to be ‘dovish’ as it would be hard to out-hawk F.X. market expectations at the moment. Traders seem primed for a further feel-good risk rally.

How did the Canadian and Norwegian dollars fare?

As oil prices rebounded, the Canadian dollar edged higher against the U.S. dollar, along with the Norwegian crown. The Australian dollar also gained 0.4% at $0.7177 on Wednesday, while the New Zealand dollar increased slightly on the day.

On the other hand, the safe-haven Japanese yen declined insignificantly versus the dollar, trading at 115.700. The euro surged forward by 0.2% on the day at $1.13825. The Euro-Swiss pair jumped up by 0.2% after adding 0.4% so far this week.

Derek Halpenny, MUFG head of research, noted that if we got to a scenario of actual progress in dialogue with Russia, we should expect a more pronounced EUR/CHF move in the green.

On Wednesday, the British pound soared by 0.1% against the greenback at $1.35605. However, the sterling remained steady versus the euro. The data showed that U.K. inflation hit an almost 30-year high of 5.5%. The Bank of England has already increased interest rates twice since December. Despite that, financial markets expect a further rate hike on March 17 after the bank’s next meeting.

How did the E.M. currencies fare?

Russia’s rouble rallied for a third consecutive session as concerns of a Russian invasion of Ukraine waned. Overall, the rouble gained 1.1% against the U.S. dollar, recouping all of its losses from last week.

Moscow stated that some troops would return to the base from near the Ukrainian border, bolstering optimistic investor sentiment and weakening safe-haven bets, including the greenback. However, the West has responded with skepticism and caution to Russia’s move. Some traders still view it as a tentative positive for financial markets.

Elena Lovén, the senior fund manager at Swedbank Robur, noted that they’re only reading headlines. Still, the tone has softened. While the risk is still there, some troops are leaving every day, or they are turning and about to leave. She added, though, that they don’t know exactly what’s happening at the border.

On Wednesday, Ukraine’s hryvnia surged forward by 0.6% against the greenback, and its dollar-denominated government bonds also jumped by about 3%.

Furthermore, South Africa’s rand soared by 0.2%. According to the new data, consumer inflation plummeted to 5.7% year on year in January from 5.9% in December.

You-Na Park-Heger, FX and E.M. analyst at Commerzbank, stated that ZAR was able to appreciate in line with other Emerging market currencies over the past weeks. The SARB’s decision to hike interest rates early on will likely support ZAR. However, once the Federal Reserve starts its rate hike cycle in March, the currency will ease against the USD.