FOREX-Ukraine tensions lift dollar, yuan holds firm

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(Updates throughout, changes byline, dateline) By Sujata Rao and Alun John LONDON/HONG KONG, Jan 24 (Reuters) - The dollar inched higher on Monday, moving further off its recent two-month lows, lifted by the tension between Russia and the West over Ukraine and the possibility of a more hawkish stance from the Federal Reserve this week. Markets were until recently not fretting about the massing of Russian troops on Ukraine's borders, but tensions have tightened several notches of late, with U.S. President Joe Biden considering boosting military assets in Eastern Europe and ordering diplomats' families to leave Kyiv. ING Bank strategist Francesco Pesole said markets were pricing more of a risk premium into the euro, with fears worsening that Russia's standoff with the West could prompt it to curb energy supplies to Europe. Meanwhile, the IHS Markit Flash Composite Purchasing Managers' Index for the euro zone, a gauge of economic health, dropped in January to its lowest since last February. The euro slipped 0.15% by 0845 GMT to $1.1325, trading just off two-week lows touched on Friday , while the dollar index was 0.10% higher at 95.72 . The greenback also gained 0.1% on the safe-haven yen with a dollar worth 113.8 yen, though the Japanese currency was still near its recent top of 113.47. The dollar index has gained some 1.3% off since Jan. 14. During this period, several banks have upped forecasts for the speed and size of policy tightening by the U.S. Federal Reserve. The Fed starts a two-day meeting on Tuesday and may signal the start of interest rate rises from March while indicating how fast it will move with reducing the size of its balance sheet. Most expect the first hike to 0.25% in March and three more to 1.0% by year end. . However, positioning data showed on Friday speculators cut net long positioning on the dollar to the lowest since September and instead added $2.6 billion worth of net positions . ING's Pesole said leaving aside the Ukraine situation, the dollar recovery could stall if the Fed signalled an implicit preference for balance sheet reduction as a means to tighten policy. "If markets see the Fed willing to let balance sheet reduction do the heavy lifting, that may force a scaleback in forecasts for the number of rate hikes," he said. "The dollar will find more support from actual rate hike expectations than expectations of draining liquidity out of the market." The Australian dollar meanwhile slipped 0.25% to two-week lows of A$0.71.52 against the greenback, ahead of Tuesday data that may show core inflation at 2.4%, the fastest rate of price growth since 2014. . The one currency to hold firm against the dollar was the Chinese yuan, which rose 0.2% to the highest since May 2018 at 6.328 Finally, Bitcoin which has almost halved in value since touching a $69,000 record in November, looked at risk of falling under $34,000 for the first time since last July . It lost 3.6% to trade around $34,962, while ether , the world's second-largest cryptocurrency, was at $2,379, having hit its lowest since July on Saturday. (Reporting by Sujata Rao and Alun John in Hong Kong; Editing by Hugh Lawson)

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