By Saikat Chatterjee

LONDON (Reuters) – The U.S. dollar is set to break a two-day losing streak on Thursday, while the Japanese yen gained, after a Russian news report of mortar fire in eastern Ukraine jangled market nerves and boosted safe haven bets.

While the greenback retreated from highs in Asia after the news broke, investors remained wary that Russia will attack Ukraine, burnishing the dollar’s safe haven appeal despite optimism at the start of this week that a diplomatic solution would be found to prevent conflict.

Against a basket of its rivals, the dollar steadied at 95.751 after rising above 96 in early Asian trading. It fell to a Feb. 11 low in the previous session.

Russia-backed rebels accused Ukrainian forces of shelling their territory in violation of agreements aimed at ending conflict in the contested Donbass area, the RIA news agency said, a report denied by Ukraine.

But in a sign that markets were not panicking, the rouble remained below a November 2020 high of 80 hit last month, while bond yields were only modestly higher. Ukraine and Russia’s sovereign dollar bond prices slipped modestly

“The situation remains fluid and we believe markets will remain subject to bouts of risk-on, risk-off in the coming days,” Brown Brothers Harriman strategists said in a note.

“Between risk-off impulses and the still-evolving Fed outlook, we believe the dollar uptrend remains intact.”

The geopolitical news eclipsed the minutes of the Fed’s January meeting, where policymakers agreed it was time to tighten monetary policy but also that decisions would depend on a meeting-by-meeting analysis of data.

Short-dated U.S. Treasury yields fell and the yield curve steepened after the minutes as traders reassessed the probability of a 50 basis point (bps) hike at the Fed’s March meeting. Money markets were pricing in a 72% likelihood of a 50 bps hike next month compared to 80% at the start of the week.

The euro rebounded after falling as much as 0.4% on the Ukraine news. But Ukraine’s denial, and the location of the reported attack within already contested territory, calmed things and the euro last traded at $1.1373.

The yen and Swiss franc extended gains, up 0.3% and 0.2% respectively versus the greenback.