By Kevin Buckland
TOKYO, Jan 25 (Reuters) - The safe-haven yen and U.S. dollar
rose on Tuesday while the risk-sensitive New Zealand dollar fell
with the euro amid escalating worries about both a potential
military conflict in Ukraine and a faster pace of Federal
Reserve policy tightening.
The Australian dollar rose briefly after strong consumer
price numbers boosted the case for a Reserve Bank interest rate
increase this year, but then succumbed to the sell-off in
riskier assets.
The Fed begins a two-day policy meeting later in the global
day, and investors will be anxious for any hints on the timing
and pace of rate hikes, as well as about how fast the central
bank will shrink its more-than $8 trillion holdings of
Treasuries and mortgage debt.
Money markets are priced for a first rate hike in March,
with three more quarter-point increases by year-end.
"The case for the Fed potentially following up a March rate
rise before the June meeting - even as early as April - is a
very compelling one, and there is a risk that the market will
still have to reprice," said Ray Attrill, head of FX strategy at
National Australia Bank in Sydney.
"The geopolitical risk has just added a new layer of safe
haven support."
Markets until recently had mostly shrugged off the massing
of Russian troops on Ukraine's borders, but tensions have
ratcheted up lately. NATO said it was putting forces on standby
and reinforcing eastern Europe with more ships and fighter jets,
in what Russia denounced as an escalation of tensions.
ING Bank strategist Francesco Pesole said markets were
pricing more of a risk premium into the euro, with fears
increasing that Russia's stand-off with the West over Ukraine
could prompt Moscow to curb energy supplies to Europe.
The euro slumped 0.35% to 128.68 yen,
approaching the five-week low of 128.42 touched overnight.
Against the greenback, the euro slipped 0.16% to
$1.13135.
The dollar declined 0.22% to 113.725 yen, nearing
a one-month low of 113.47 touched in the previous session.
The dollar index, which measures the greenback
against six major peers, edged up 0.06% to 95.951, after
climbing as high as 96.135 overnight for the first time since
Jan. 10.
New Zealand's kiwi dollar dropped 0.37% to $0.6671.
The Aussie fared relatively better, retreating
0.19% to $0.7132. Earlier it leapt as much as 0.45% to $0.7178
after a key inflation gauge surged to a 7 1/2-year peak.
Many analysts contend that such a pace will force the RBA
into a rate hike this year, despite Governor Philip Lowe
previously maintaining that such an eventuality was extremely
unlikely. The central bank meets on Feb. 1 to decide policy.
After the inflation data, TD Securities brought forward its
forecast for a rise in the policy rate from a record low 0.1% to
0.25% to August, having previously expected a rise in the the
fourth quarter of this year.
"The RBA's dovish stance is untenable," TD rates strategist
Prashant Newnaha wrote in a client note.
At next week's meeting, "we expect the RBA's central
forecast will now shift to a hike in 2023, but the RBA will
possibly open the door to a rate hike in 2022," he wrote.
Money markets have long been at odds with Lowe's dovish
stance, and are priced for a rate hike as early as May.
Meanwhile, cryptocurrencies traded weaker, but were well off
the lows tested at the start of the week. Bitcoin
changed hands at close to $36,000, after dipping below $33,000
on Monday for the first time in six months. It has halved in
value since touching a record $69,000 in November.
Smaller rival ether last traded around $2,400,
following its dive to a six-month low of $2,160.
(Reporting by Kevin Buckland; Editing by Edwina Gibbs & Simon
Cameron-Moore)