Dollar Lower, Euro Gains on Peace Talks; Yen Rebounds

The U.S. dollar weakened Wednesday as signs of progress in the peace talks between Ukraine and Russia boosted risk sentiment to the detriment of this safe haven and the benefit of the euro, while the Japanese yen recovered on fears of official intervention.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 98.170.

Additionally, EUR/USD rose 0.3% to 1.1116 following Russia promising on Tuesday to scale down military operations around Kyiv and Ukraine proposing adopting a neutral status, moves that offer hope of progress in ending the conflict between the two countries after face-to-face negotiations in Istanbul.

The euro has been battered in recent weeks over fears about the economic fallout from the war in Ukraine.

That said, these gains for the single currency could be short-lived amid skepticism over Russia’s intentions as well as the sharp gains in U.S. Treasury yields as traders position for aggressive tightening by the U.S. Federal Reserve.

“EUR/USD is now looking overvalued in the short-term after the pair failed to correct sharply on the back of the significant widening in USD-EUR short-term swap rate differential,” said analysts at ING, in a note. “We estimate the current short-term fair value in the 1.07/1.08 area at the moment.”

Elsewhere, USD/JPY dropped 0.9% to 121.72, retreating after recent sharp gains on the back of the Bank of Japan buying bonds this week to defend its 0.25% 10-year yield target, maintaining its very accommodative stance in the face of monetary policy tightening by a number of the world’s central banks, and the Fed in particular.

A meeting between Bank of Japan Governor Haruhiko Kuroda and Prime Minister Fumio Kishida raised speculation that the country’s senior officials are concerned with the extent of the drop in the yen.

“We think the yen remains highly vulnerable as long as bond yields continue to press higher,” added ING. “More indications that Japan is taking action to curb JPY volatility could offer some support, but that appears to be a secondary factor.”

Expectations are growing that the Fed will raise rates by a half-point rather than the customary quarter-point increase when it next meets, and traders will look at today’s data dump for confirmation.

March’s ADP nonfarm employment change data is set to be released Wednesday at 8:15 AM ET (1215 GMT), with consensus forecasts looking for companies to have added 450,000 jobs, while GDP for the fourth quarter, at 8:30 AM ET, is set to show a 7.1% reading from the month before, well above the previous 2.3% release.

GBP/USD rose 0.3% to 1.3121, benefiting from perceived progress in the Ukraine peace talks. Also, U.K. shop prices rose in March at the fastest annual pace in more than a decade, suggesting that the Bank of England will continue hiking interest rates to combat inflation.

AUD/USD rose 0.3% to 0.7527, holding just below recent peaks, while USD/CNY fell 0.1% to 6.3564.