Investing.com - The U.S. dollar rose Wednesday, boosted by its safe haven after the US closed its embassy in Kyiv, while sterling outperformed after UK inflation rose more than expected in October.
At 04:45 ET (09:45 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% higher at 106.490, bouncing after falling to a one-week low earlier in the session.
The index climbed to its highest level in a year last week in the wake of Donald Trump’s victory in the presidential election, buoyed by expectations for big fiscal spending, higher tariffs and tighter immigration, measures that could foster inflation and potentially slow Federal Reserve easing.
Geopolitics help dollar
The dollar received a boost Wednesday after the United States shut its embassy in Kyiv due to "specific information of a potential significant air attack."
This warning came a day after Ukraine used US missiles to strike Russian territory, and Russian President Vladimir Putin changed the threshold for the use of his country’s nuclear arsenal.
The developments threaten to drag the West even further into the conflict between Russia and Ukraine, resulting in demand for the dollar.
“So far, this has translated to some noise in the FX market, but no big moves,” said analysts at ING, in a note.
“We suspect the dynamics in dollar crosses were partly still affected by the dollar’s overbought positioning status, which may have contributed to curbing geopolitics-related gains.”
With little on the economic data slate Wednesday, investors will focus on commentary from Federal Reserve Governors Lisa Cook and Michelle Bowman, as well as Boston Fed President Susan Collins for clues of future Fed monetary policy decisions.
Traders continue to pare back expectations for an interest-rate cut at the Fed's next meeting in December. Odds now stand at 58.9%%, down from 82.5% a week ago, according to CME's FedWatch Tool.
UK inflation surprises to upside
In Europe, GBP/USD fell 0.1% to 1.2671, trading marginally lower due to the strength of the US dollar even as UK CPI data was stronger than expected in October, casting doubt about a rate cut by the Bank of England in December.
Consumer prices rose by an annual 2.3% last month, above the 2.2% rise expected, and by 0.6% on a monthly basis in October, the biggest month-to-month rise in the annual CPI rate since October 2022.
This rise comes before the impact of the first budget of Britain's new government, which included higher taxes on companies, is felt.
The Bank of England said the budget was likely to add to inflation next year, and Governor Andrew Bailey on Tuesday stressed the central bank's message that borrowing costs are likely to come down only gradually.
“Even if there is another inflation print before the next BoE meeting, we would probably need a sharp slowdown in services inflation to put a cut back on the table,” ING added.
EUR/USD traded 0.3% lower to 1.0560, with the European Central Bank expected to continue cutting interest rates given the lack of serious growth in the region while inflation has fallen back to target.
ECB policymaker Fabio Panetta said on Tuesday the central bank should cut interest rates so they no longer curb economic growth, or so they even stimulate it, and give more guidance now that post-pandemic shocks are abating and inflation is normalising.
"With inflation close to target and domestic demand stagnant, restrictive monetary conditions are no longer necessary," he said.
PBoC keeps rates unchanged
USD/JPY rose 0.7% to 155.80, with the Japanese yen remaining fragile after Japan reported a bigger-than-expected trade deficit in October.
The focus is now turning to upcoming consumer inflation data from the country on Friday.
USD/CNY climbed 0.1% to 7.2462, hovering around three-month highs.
The People’s Bank of China left its benchmark loan prime rates unchanged as widely expected, after trimming the rate last month.
Wednesday’s hold came on the heels of several more stimulus measures from China since late-September, although Beijing is yet to unlock more targeted fiscal measures.