Euro on defensive as Ukraine tension, hawkish Fed buoy dollar, yen By

By Kevin Buckland

TOKYO (Reuters) – The euro hovered near 1-month lows versus the dollar and yen on Wednesday, hurt by concerns about the potential for military conflict in Ukraine and ahead of the Federal Reserve wrapping a meeting that could herald accelerated monetary tightening.

Bank of Canada is also set to announce policy later in the day, and the Canadian dollar saw some of the biggest action in Asian trade, strengthening 0.21% as traders fretted over the outcome with chances of a rate hike seen finely balanced.

The euro slipped 0.07% to $1.12945 after hitting $1.12640 overnight for the first time since Dec. 21. It was little changed at 128.69 yen, after touching 128.25 in the previous session, also a first since Dec. 21.

Western leaders stepped up preparations for any Russian military action in Ukraine while Moscow said it was watching with great concern after 8,500 U.S. troops were put on alert to deploy to Europe in the event of an escalation.

Most of the market’s angst was, however, focused on the Fed as traders awaited clues to the timing and pace of U.S. interest rate hikes, as well as how the central bank will go about slimming down its almost $9 trillion balance sheet, a process dubbed quantitative tightening (QT).

“Market sentiment remains fragile,” said TD Securities strategists, noting that any hints ‘around the starting point for QT or ‘sooner’ and ‘faster’ on hikes could be market-moving.”

But they added that they didn’t expect definitive signals and the result could be mixed messages.

Money markets are currently priced for a first hike in March, followed by three more quarter-point increases by year-end.

The , which measures the currency against six major peers, edged 0.06% higher to 96.030, after climbing to 96.273 on Tuesday, its strongest level since Jan. 7. It has rallied as much as 1.74% from a two-month low touched on Jan. 14.

“I think the Fed will acknowledge that a March hike is likely, and then key is if they’ll indicate a faster pace of hikes and also an earlier end to tapering than they’ve signalled so far,” said Shinichiro Kadota, senior FX strategist at Barclays (LON:). “If it turns out to be more hawkish then obviously the dollar will benefit.”

On the simmering tensions around Ukraine, he said: “until that is solved, there should be demand for safe haven currencies, so I think the yen should remain bid.”

Elsewhere, sterling was little changed at $1.3503 after dipping to $1.3436 overnight, its lowest in more than three weeks.

In addition to jitters over Ukraine and the Fed, sterling is contending with political uncertainty at home, with Prime Minister Boris Johnson under investigation for possible COVID-19 lockdown breaches. The findings of an internal inquiry could be announced as soon as Wednesday,…