The euro pared some of its earlier losses on Monday, mirroring the rouble, which also trimmed some of its declines from an all-time low, after Russia said it had started talks with Ukraine.
Russia's foreign ministry on Monday said talks between Ukraine and Russia had begun, shortly after the Ukrainian side had said the same. Russia launched an invasion of Ukraine on Thursday.
After plunging 30% to 120 per dollar, the rouble recovered some ground. It was still down 20%, however, changing hands at 102 per dollar at 1210 GMT.
The euro, which fell around 1% in early London trading, was 0.7% lower against the dollar at $1.1194. It also pared some of its declines against the yen to trade 0.6% lower at 129.4 yen per euro.
"The euro is holding on well this morning all said and done, based on some recovery in the rouble," said Neil Jones, Head of FX Sales at Mizuho Bank. "The market is turning its attention to Russia/Ukraine talks."
The euro was still 1% lower versus the Swiss franc at 1.0328 as the safe haven was in demand after Western nations imposed tough new sanctions on Russia for its invasion of Ukraine.
Western allies have ramped up efforts to punish Russia with new sanctions including cutting some of its banks off the SWIFT financial network and limiting Moscow's ability to deploy its $630 billion foreign reserves and shuttering their airspace to Russian aircraft. Companies also reported divestment plans.
Adding to market nerves, Russian President Vladimir Putin put Russia's "deterrence forces" - which wield nuclear weapons - on high alert.
Those measures are expected to pulverize the country's economy and prevent the Central Bank of Russia from using its foreign reserves for outright FX interventions, analysts said.
Russia's central bank on Monday sharply raised its key policy rate to 20% from 9.5%, a day after announcing a slew of measures to support domestic markets. But that did little to support the rouble.
Separately, a dollar rally eased, with the greenback edging 0.17% lower to 96.986 against a basket of peers.
Overall across FX markets volatility has soared, with one commonly followed measure hitting its highest since December 2020.
Other European currencies also pared some of their earlier losses versus the dollar. The Swedish crown dropped 0.9% to 9.4820 crowns, after touching 9.6140, and Norway's crown fell 0.6% to 8.8915 crowns, after hitting 9.0200.
Markets are now pricing in a 90% chance the U.S. Federal Reserve will hike interest rates by 25 basis points at its March meeting, according to CME's Fedwatch tool, as the invasion put an end to speculation that the Fed will jump in with a 50 bps hike.
Investors also scaled back their bets for European Central Bank rate hikes in 2022.
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