The dollar pared gains against the euro on Tuesday after rising tensions in Ukraine sent US bond yields lower and capped demand for the US currency. Russia declared Ukraine on the brink of civil war on Tuesday as Kiev said an "anti-terrorist operation" against pro-Moscow separatists was under way, with troops and armoured personnel carriers seen near a flashpoint eastern town.
"The tensions surrounding Ukraine seem to be moving back to the foreground as a market driver," said Vassili Serebriakov, currency strategist at BNP Paribas in New York. The worries surrounding Ukraine fuelled safe-haven bids for US Treasuries, driving down the yield on the bonds and hurting demand for the dollar. The euro also found some support as the impact from recent comments from European Central Bank policymakers suggesting the ECB could further ease policy to protect the euro from deflation weakened.
"We've been hearing a lot from the ECB lately, but ultimately the deciding factor will be whether the ECB moves on policy," said Serebriakov. ECB President Mario Draghi said Saturday that "the strengthening of the exchange rate would require further monetary policy accommodation," marking the strongest signal yet the central bank would act to prevent deflation in the shared currency.
The euro recovered after earlier falling against the dollar on data from the German ZEW survey of investor and analyst sentiment, which fell for a fourth consecutive month in April as the crisis in Ukraine weighed. But the current conditions survey rose to its highest level since July 2011.
US economic data on Tuesday did little to support the dollar. Data showing an uptick in US inflation that boosted the currency early in the session was later offset by disappointing US homebuilder sentiment and manufacturing data. The Labour Department said its Consumer Price Index increased 0.2 percent last month as a rise in food and shelter costs offset a decline in gasoline prices. The CPI index gained 0.1 percent in February.
"The dollar is not reflecting fully the CPI data because of the fear in the market regarding Ukraine and the more mixed US data that we have seen," said Sebastien Galy, currency strategist at Societe Generale in New York The New York Federal Reserve's Empire State general business conditions index, a gauge of manufacturing in New York state, fell to 1.29 in April, marking the lowest level since November and down from 5.61 in March.
The NAHB/Wells Fargo Housing Market index of US homebuilder sentiment rose to 47 in April from a downwardly revised 46 in March. Economists had predicted a rebound to 50. The euro last traded down 0.08 percent at $1.3809, after having retreated around a half percent on Monday. The dollar was up 0.01 percent against the Japanese yen, at 101.85 yen, and was up 0.06 percent against the Swiss franc, at 0.8803 franc.
The US dollar index, which measures the dollar against six major currencies, was last up 0.09 percent. The Russian rouble continued to fall against the dollar on the tensions over Ukraine. The dollar was last up 0.64 percent against the rouble to trade at 36.2 roubles.
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