Dollar falls, euro gains on Ukraine peace talks

The dollar index was down 0.4% on the day at 98.019, while the euro rallied against the dollar, with the pair up 0.4% at 1.11275

The dollar fell and the euro gained on Wednesday as markets took a positive view on peace talks in Ukraine, while the Japanese yen recovered from seven-year lows as traders speculated that officials were uncomfortable with its recent weakness.

Equity markets were up in the Asian session, continuing a pick-up in sentiment in Wall Streets as markets became hopeful that the Ukraine conflict could end - although this move ran out of steam as European shares opened in the red.

Russia promised on Tuesday to reduce its attack on Kyiv, but the United States said it had not seen ‘signs of real seriousness’ from Russia in pursuing peace. The dollar extended its losses on Wednesday, as investors changed their mind on their defensive bets.

At 0739 GMT, the dollar index was down 0.4% on the day at 98.019, having touched a 12-day low in early European trading. The euro rallied against the dollar, with the pair up 0.4% at 1.11275.

The risk-sensitive Australian and New Zealand dollars also gained, with the Aussie up 0.1% on the day at $0.75125.

Markets appear to have taken an optimistic stance well before peace talks have yielded any result, ING FX strategists wrote in a note to clients. The FX market may be increasingly detached from trading the Russia-Ukraine situation and start to catch up with the wide moves in rate and growth differentials, all of which point to a stronger dollar.

Investors expect the U.S. Federal Reserve, which raised rates by 25 basis points at its March 16 meeting, to be more hawkish than the European Central Bank, driving the dollar higher against the euro.

Philadelphia Federal Reserve President Patrick Harker said on Tuesday he favoured a ‘methodical’ series of quarter-percentage-point interest rate increases, but is open to larger half-percentage-point hikes if inflation does not soon show signs of easing.

The U.S. Treasury yield curve, widely watched as a barometer of the economy's health, briefly "inverted" on Tuesday in a warning sign bond investors see a recession on the horizon.