The U.S. Dollar rose in European trading on Wednesday as tensions over Ukraine were raised by Russian President Vladimir Putin. Traders awaited a significant Federal Reserve rate increase.
The Dollar Index which measures the greenback against six currencies traded 0.5% higher at 110.457 at 03:00 ET (07:00 GMT). This is close to the two-decade high of 110.79 earlier in the month.
In a recorded video address, Vladimir Putin announced the mobilization of Russia’s 2,000,000 strong military reserve earlier Wednesday. This confirmed his intent to annexe those areas of Ukraine currently under Russian control.
Related: Rising dollar as investors prepare for Fed
Putin raised geopolitical tensions by making a vague threat to use Russia’s nuclear arsenal in defense of his conquests within Ukraine. He also accused the West, accusing it of “nuclear Blackmail”.
“If Russia’s territorial integrity are threatened, we will use every means at our disposal,” Putin said. Putin stated that this is not a joke.
The biggest losses were felt by the euro, with EUR/USD dropping 0.7% to 0.9903, close to its lowest point of 0.99 since September’s start.
In an attempt to combat the stubbornly high inflation, the dollar has also benefitted from the expectation that the U.S. Federal Reserve would announce an interest rates increase at least 75 basis point later Wednesday.
However, an increase of 100% is possible as the consumer price Index last week showed that inflation remains near 40-year highs.
Analysts at ING wrote in a note that “there seems no reason for Fed to soften hawkishness displayed at the Jackson Hole symposium”
These expectations drove yields on the 2 year U.S Treasury notes to 3.992% overnight. Yields on the benchmark 10 year Treasury rose by 3.604%, which is the highest rate since 2011.
USD/JPY dropped 0.1% to 143.64. The safe haven status of the yen helped the Japanese currency despite rising Treasury yields. This year, the yen has fallen around 20% against USD.
On Thursday, the Bank of Japan will hold a policy meeting. It is widely expected that it will keep its ultra-easy stimulus settings intact despite data Tuesday showing Japan’s core consumer inflation increasing to 2.8% in August. This was its fastest annual rate in almost eight years.
GBP/USD dropped 0.4% to 1.1338, a new 37-year low of 1.1351, as worries about Putin’s intentions outweighed any possibility of another interest rate rise by the Bank of England.
Related: The US dollar keeps getting stronger against the rupee.
The risk-sensitive AUD/USD dropped 0.5% to 0.6658. USD/CNY rose 0.5% up to 7.0509, a psychologically significant 7 level.
