The U.S. dollar index recovered after falling on Tuesday as volatile oil prices impacted the euro and markets grappled with the significance of talks between Russia and Ukraine and indications that COVID lockdowns will crimp economic growth in China.
The dollar index against major currencies was up less than 0.1% in the New York afternoon as markets awaited statements on Wednesday from the U.S. Federal Reserve after a meeting on monetary policy.
The euro was last down less than 0.1% to $1.0933 after having been up nearly 0.5%. The British pound was up 0.2% to $1.3027.
The Japanese yen continued trading at its weakest levels to the dollar in five years as the greenback gained 0.1% to 118.335 yen.
The dollar index had lost nearly 0.5% overnight after oil prices fell below $100 a barrel, bolstering the euro. The index recovered after oil turned up from a low for the day and was last at $99.14, up 3% since Russia invaded Ukraine on Feb. 24.
Brent crude futures dropped as much as 8% after concerns over supply were eased by ongoing Ukraine ceasefire talks and as rising COVID-19 cases in China suggested slower economic growth and less demand for oil.
The European economy and the single currency are especially sensitive to the war and to the price of oil.
“This (the drop in oil price) reflects the hope that the talks between the Russian and Ukrainian negotiators might lead to an imminent and peaceful solution after all,” Commerzbank forex analysts said in a note to clients.
Early in the day, major currency pairs had been relatively steady as markets waited to hear on Wednesday the tone of U.S. Federal Reserve comments on interest rate policies in coming months.
Traders want to see if the Fed gives hints to how quickly it will raise rates again after putting through the quarter-point increase they expect to be announced on Wednesday.
“The path that the Fed lays out for the rest of the year is going to be more interesting than the actual rate hike itself,” said Minh Trang, senior FX trader at Silicon Valley Bank.
The Fed’s policy statement and economic projections are due at 2 p.m. EDT (1800 GMT) and will be followed by a press conference. The central bank’s effort to bring down surging inflation without triggering a recession is being challenged further by the impact of the Ukraine war.
Ukraine President Volodymyr Zelenskiy said on Tuesday that Kyiv was prepared to accept security guarantees that stop short of its long-term objective of the NATO alliance membership, which Moscow opposes. Peace talks with Russia, via video link, resumed on Tuesday, the first time a round of talks ran into a second day.
The dollar’s rise since May last year makes the tone of Fed comments on Wednesday more important.
Its recent gains have come on its safe haven status during the Ukraine war and on expectations that U.S. interest rates will rise faster than rates on other currencies. The Bank of Japan, for example, is not expected to raise interest rates when it meets on Friday.
“The dollar is at pretty high levels. We would need a hawkish surprise from the Fed to see a further rise, but I think the bar is quite high for that,” Matthew Ryan, senior market analyst at Ebury, said.
“It will be difficult for the dollar to stage any meaningful rally after the Fed policy meeting.”
In cryptocurrencies bitcoin and ether were less than 1% changed for the day with bitcoin at $39,350 and ether at $2,604.