(Investing.com) - The U.S. dollar weakened in early European trade Monday as risk sentiment received support from the news of a likely meeting between U.S. President Joe Biden and Russian President Vladimir Putin to discuss the fraught situation on the Ukrainian border.
At 2:45 AM ET (0745 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.3% lower at 95.745.
News of the potential summit came from the office of French President Emmanuel Macron, who had proposed the idea to the two leaders. The White House said in a statement that Biden had accepted the meeting "in principle" but only "if an invasion hasn't happened," while the Kremlin was silent on the matter.
The dollar had been one of the main beneficiaries last week of the heightened tensions on the Ukrainian border, with Russia massing troops and undertaking military exercises in neighboring Belarus. At the same time, Ukrainian forces and Russia-backed rebels exchanged accusations of violence in the east of the country.
EUR/USD rose 0.5% to 1.1373, with the euro boosted by the potential of diplomacy winning the day. USD/JPY fell 0.1% to 114.96, giving up early gains, while the risk-sensitive AUD/USD rose 0.6% to 0.7217.
The Russian ruble, which has been sensitive to the prospect of war, strengthened, with USD/RUB down 0.9% at 76.6073.
"Geopolitics has stolen the spotlight and created worries for investors and people around the world," said analysts from Nordea in a note. "The Russia-Ukraine crisis is still ongoing and unfortunately we are far from certain that geopolitical risks have peaked."
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Elsewhere, German producer prices rose 2.2% on the month in January, climbing 25% on the year, an indication of the inflation pressures the European Central Bank officials were under when they signaled a shift toward a more hawkish policy.
German manufacturing PMI numbers for February are due later in the session. They will be studied carefully to see how this important sector, a major regional driver of growth, is coping with the Omicron situation and the associated supply-side difficulties.
Elsewhere, the U.S. market is closed on Monday for the Presidents' Day holiday. Still, the expectation of aggressive moves by the Federal Reserve to combat consumer inflation at levels not seen for 40 years continues to provide support for the dollar.
With this in mind, the PCE price index, rumored to be the Fed's favorite inflation measure, is due for release on Friday and will be closely watched. It's forecast to have risen 6% year-over-year in January, while the core reading, which excludes food and fuel prices, is expected to rise 5.2%.
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Several Fed officials will also give speeches during the week, including Richmond Fed President Tom Barkin, San Francisco Fed President Mary Daly, Cleveland Fed President Loretta Mester, and Fed Governor Christopher Waller.
"Going forward, we do not expect the current [Ukraine] crisis to be the key driver of the risk sentiment this year. It's much more likely that central banks and the inflation outlook will dominate the narrative in the financial markets," added Nordea.
"However, countries and companies which are closely linked to Russia could face negative spillover effects and the Russian ruble remains vulnerable."
