FOREX-Dollar hits two-decade high as Putin rattles markets before Fed

* Dollar index at two-decade high

* Euro slides back towards two-decade lows

By Dhara Ranasinghe

LONDON, September 21 (Reuters) – The dollar jumped to a fresh two-decade high on Wednesday, as comments from Russian President Vladimir Putin rocked markets ahead of another likely aggressive rate hike by the US Federal Reserve.

Putin ordered Russia’s first mobilization since World War II and warned the West that if Moscow continued what he called “nuclear blackmail,” it would respond with the might of its vast arsenal.

The news pushed the dollar index, which measures the value of the greenback against other major currencies, by more than 0.5% to 110.87 – its highest level since 2002.

European currencies bore the brunt of selling in the currency markets as Putin’s comments heightened concerns about the economic outlook for a region already badly hit by Russia’s choke on gas supplies to Europe.

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The euro fell to a two-week low of $0.9885, in sight of two-decade lows set earlier this month. It was last down 0.6% to $0.9912.

Sterling, down 0.4%, fell to a fresh 37-year low of $1.1304 even before Putin began speaking.

“The Russia headlines steal the thunder from the Fed, at least for now,” said Kenneth Broux, currency strategist at Societe Generale.

“Concerns about an escalation of the conflict are hurting European currencies. And if the Fed is also hawkish tonight then you could see the losses snowball.”

Later on Wednesday, the Federal Reserve is expected to hike interest rates by three-quarters of a percentage point for the third consecutive month, signaling how much further and how fast borrowing costs need to rise to tame a potentially scathing burst of inflation.

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The policy decision, due around 1800 GMT, will mark the latest step in a synchronized policy shift by global central banks that will test the resilience of the global economy and countries’ ability to deal with exchange rate shocks as the dollar strengthens.

The dollar index is up almost 16% this year and is poised for its biggest annual jump since 1981.

Analysts said the backdrop of heightened geopolitical uncertainty only contributed to the dollar’s strength.

“Obviously we have a situation where investors are flocking to safe havens, and we also have an expectation that we’re going to see another rate hike from the Federal Reserve today,” said Danni Hewson, financial analyst at AJ Bell in London.

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“So the dollar was already looking pretty punchy, and just the proximity of countries in Europe to Ukraine makes people think about what the situation might be like if the war in Ukraine becomes something bigger.”

The Australian and New Zealand dollars, meanwhile, hit multi-year lows on Wednesday. The Aussie hit a low of $0.6655, its lowest since June 2020, while the Kiwi fell to $0.5877, its lowest since April 2020.

(Reporting by Dhara Ranasinghe; Additional reporting by Bansari Mayur Kamdar; Editing by Edwina Gibbs)

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