By Chuck Mikolajczak
NEW YORK (Reuters) -The dollar index rose on Tuesday, after an initial boost to safe-haven currencies such as the greenback, Swiss franc and yen prompted by an announcement by Russia that it would lower its threshold for a nuclear strike faded following comments by Russian and U.S. officials.
Ukraine used U.S. ATACMS missiles to strike Russian territory for the first time, Moscow said, in an attack regarded by Russia as a major increase in hostilities on the war's 1,000th day.
Putin approved the change to Russia's nuclear doctrine days after two U.S. officials and a source familiar with the decision said on Sunday that U.S. President Joe Biden's administration would allow Ukraine to use U.S.-made weapons to strike deep into Russia.
The dollar index, which measures the greenback against a basket of currencies, rose 0.03% to 106.25 after reaching a high of 106.63 in the session, with the euro down 0.12% at $1.0586.
The initial reaction in markets faded somewhat after Russian Foreign Minister Sergei Lavrov said the country will "do everything possible" to avoid the onset of nuclear war, while showing approval for Germany's decision on Monday not to provide long-range missiles to Ukraine, calling it "a responsible position."
In addition, the U.S. said it has not seen any reason to adjust its own nuclear posture in response.
"We're seeing a reversal after Lavrov's comments, also the U.S. won't respond to this change in the Russian nuclear doctrine, that's played a role too in sentiment calming down here a bit," said Erik Bregar, director, FX & precious metals risk management, at Silver Gold Bull in Toronto.
"A nice three-week flush of over-leveraged long positions and geopolitical risk hasn't gone away, it's still a crazy, dangerous world out there."
The yen was unchanged to 154.68 per dollar after rising as much as 0.91% against the greenback. The Japanese currency was last up 0.11% to 163.74 against the euro after strengthening to a six-week high of 161.50.
The dollar had strengthened as much as 9% against the yen since the beginning of October to as much as 156.74, rising above the 156 mark for the first time since July last week and sparking the possibility Japanese authorities may once again step in to shore up the currency.
Against the Swiss franc, the dollar edged up 0.02% to 0.883 after earlier falling as much as 0.32% on the day.
The Russian rouble weakened 0.83% against the greenback to 100.571 per dollar. The official exchange rate of the Russian rouble weakened past 100 to the U.S. dollar for the first time since October 2023.
The dollar index has been rallying on growing expectations the Federal Reserve may slow its path of interest rate cuts and on concerns incoming U.S. President Donald Trump's policies could reignite inflation.
Expectations for the path of rate cuts have been dialed back, while volatile, in recent weeks, with markets currently pricing in a 59.1% chance of a 25 basis point cut at the Fed's December meeting, down from 76.8% a month ago, according to CME's FedWatch Tool.
Kansas City Fed President Jeffrey Schmid said it remains uncertain how far interest rates can fall, but the recent cuts by the central bank indicate confidence that inflation is heading towards its 2% target.
The European Central Bank is also expected to continue cutting interest rates in an effort to stimulate growth in the region.
In the latest comments from ECB policymakers, Fabio Panetta said the central bank should cut interest rates so they no longer curb economic growth, or even stimulate it, and give more guidance now that post-pandemic shocks are waning and inflation is normalizing.
Panetta's comments came after two top ECB policymakers on Monday signaled they were more worried about the damage that expected new U.S. trade tariffs would do to growth than any impact on inflation.
Sterling weakened 0.04% to $1.2671.