The euro's gains fizzled and the dollar received a safe-haven boost on Monday after the Kremlin said there were no concrete plans for a summit over Ukraine between the Russian and US presidents.
Weekend reports that Russia’s President Vladimir Putin and his US counterpart Joe Biden had agreed in principle to discuss finding a possible path out of Europe's biggest military crisis in decades had prompted investors to cautiously buy stocks and the euro and pull capital away from safe-haven shelters such as the yen and government debt, reports Reuters.
But the latest news, along with reports of border skirmishes, prompted investors to take shelter, reports Reuters.
"Tensions are running high," said Kenneth Broux, an FX strategist at Societe Generale.
Against the safe-haven Swiss franc, the euro currency sank half a percent to a three-week low at 1.0384 francs per euro.
Versus the greenback the euro, which was up 0.6 per cent at one stage during early London trading, slowly abandoned those gains and was up a meagre 0.1 per cent at $1.1336.
Russia's FSB security service said a shell fired from Ukrainian territory had destroyed a border guard post, while Ukrainian authorities warned that hackers were preparing to launch major attacks on government agencies, banks and the defence sector on Tuesday.
"The optimism has dissipated," said Jeremy Stretch, head of G10 FX strategy at CIBC, pointing to fresh news headlines suggesting that Britain believes Russia may still be planning an invasion. read more
"Caution is the order of the day," he said.
During the same time, the dollar index recovered most of its losses and was down only 0.13 per cent against major rival currencies.
Echoing the mood swing over the prospects of a de-escalation, European stock markets turned sharply negative after opening in positive territory, with a gauge of European stock market volatility (.V2TX) at its highest level since November 2020.
By contrast, safe-have currencies that have benefited from the tensions spurred by Russia's military build-up on Ukraine's borders were back in favour. The Swiss franc added 0.54 per cent at $0.9164 versus a broadly sturdy US dollar.
Bitcoin, which was on a recovery path from a mild bruising over the weekend, struggled to stay in positive territory, holding around $38,500 levels.
While the outcome of negotiations to find a peaceful way out of the Ukrainian crisis remains uncertain, more volatility is expected ahead. A gauge of currency market volatility (.DBCVIX) held near its highest levels since February 2021.
Currency markets participants are also focused on central bank policy, seeking clues on the speed and size of interest rate hikes in major markets.
Investors will be closely watching remarks from US Federal Reserve policymakers this week for any hint that an expected rate hike at the Fed's March meeting could ever more towards to 50 basis points instead of the current consensus for a 25 basis point increase.