Dollar spikes on Ukraine jitters after Russia reports attack

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SINGAPORE, Feb 17 (Reuters) – The dollar bounced on Thursday after a Russian news report of mortar fire in eastern Ukraine jangled market nerves and sent investors in to safe havens.

Russia-backed rebels accused Ukrainian forces of shelling their territory in violation of agreements aimed at ending conflict in the contested Donbass area, the RIA news agency said, a report later denied by Ukraine.

Russia has massed more than 100,000 troops close to Ukraine’s borders and the West has threatened Russia with new sanctions if it attacks.

The euro fell as much as 0.4% as traders immediately saw risks of a wider war. But Ukraine’s denial and the location of the reported attack within already contested territory calmed things and the euro last sat at $1.1354.

The risk-sensitive Australian dollar lost as much as 0.6% before settling 0.2% lower at $0.7185. The safe-haven yen rose about 0.1% to 115.29 per dollar.

“There is a lot of anxiety,” said Bank of Singapore strategist Moh Siong Sim. “It’s not clear whether it’s some local event or something which could flare up…right now such headlines are keeping the markets a bit nervous.”

The Russian rouble, which has been sensitive to the prospect of war as sanctions loom on Russia, fell 0.7%.

The standoff on Europe’s eastern edge is one of the deepest crises in East-West relations for decades. Earlier in the day, a U.S. official said Russia was increasing troop numbers near its border with Ukraine rather than withdrawing, as Moscow claimed.

The official, who spoke on condition of anonymity, also said Russia could “launch a false pretext at any moment” to justify an invasion, something Russia has dismissed.

Safe-haven Treasuries rallied and U.S. stock futures fell with the mood, though the lack of clarity around the situation capped larger moves.

The U.S. dollar index was up 0.1% to 95.927.

JAPAN DEFICIT

Economic data also added some support to the dollar on Thursday, offsetting some overnight softness when minutes from the Federal Reserve’s last meeting were less hawkish than some investors had expected.

Data showed Japan ran its biggest trade deficit in a single month in eight years in January, and that follows Europe’s trade gap widening in December as energy prices surge.

Rates expectations held the kiwi <NZD=D3> and sterling  steady.

The New Zealand dollar was last flat at $0.6685 after touching a one-week high of $0.6703.

A 25 basis point (bp) rate hike in New Zealand is fully priced for next week, with swaps trade pointing to a better-than-one-in-four chance of a 50 bps hike.

March hike expectations are also holding sterling firm and it was last steady at $1.3580.

Ahead on Thursday, speeches from Bank of Spain Governor Pablo Hernández de Cos and European Central Bank (ECB) chief economist Philip Lane at 0800 GMT and 1400 GMT, respectively, will be closely watched for clues on the ECB outlook.

Federal Reserve Bank of St. Louis President James Bullard speaks at 1600 GMT and U.S. jobless claims and the Philadelphia Fed manufacturing survey are also due.

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