Peace talks send euro higher, overshadowing expected Fed rate hike

The euro jumped on Wednesday, set for its third consecutive day of gains, after Russian Foreign Minister Sergei Lavrov said peace talks with Ukraine were not easy but there was hope for compromise.

In a busy day for markets, a stronger euro and Chinese yuan overshadowed the dollar index, which fell ahead of a Federal Reserve policy announcement with markets expecting the central bank to hike interest rates for the first time in three years.

The euro was 0.4% higher at $1.10005 by 1230 GMT after Lavrov said that some deals with Ukraine were close to being agreed, with neutral status for Kyiv under “serious” consideration.

Ukrainian President Volodymyr Zelenskiy said the talks were sounding more realistic but more time was needed.

The euro and other European currencies including the Swedish and Norwegian crowns found some support from the developments in the talks, said Neil Jones, head of FX Sales.

“FX risk sentiment is buoyed by the super rallies in Asia stock markets running into a less negative tone on European geopolitics,” he added.

The Swedish crown was set for its best week against the single currency since May 2020. It rose 1% to a five-week high of 10.4275 after Riksbank Governor Stefan Ingves said a rate hike may come sooner than 2024, as initially planned, amid surging inflation.

Sterling rose 0.4% to $1.3091, ticking up from Tuesday’s 16-month low of $1.3000. Money markets expect the Bank of England to raise rates by another quarter point on Thursday.

The commodity-linked Norwegian crown rose 1.3% versus the dollar to 8.9040. The Aussie added 0.8% to $0.72495.

Meanwhile, the dollar index – which measures the greenback against six major currencies, with the euro the most heavily weighted – fell 0.33% to 98.604.

The dollar stood at 118.315 yen, little changed from Tuesday when it touched 118.450 yen for the first time since January 2017.

Money markets are fully pricing a Fed interest rate hike later in the day, while the Bank of Japan is expected to leave ultra-loose policy settings in place when it reviews its policy on Friday.

The U.S. dollar eased 0.3% to 6.3712 yuan in the offshore market after China’s Xinhua news agency cited Vice Premier Liu He as saying the country will roll out policy steps favourable for its capital markets.

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