Investors will be hanging on every word from Federal Reserve boss Jerome Powell after the bank's latest meeting, looking for insight into its policy plans

London (AFP) - European stock markets recovered from initial falls Wednesday, as traders awaited another hefty US interest rate hike from the Federal Reserve.

The dollar reached the highest level in 20 years against a basket of major rival currencies with investors seeking safety as Russia escalates operations over Ukraine.

The Dollar index, which compares the US unit against currencies including the euro, pound and yen, jumped to 110.87 points, also as the Fed prepares a third successive jumbo rate hike to combat decades-high inflation.

The British pound hit a new 37-year low at $1.1305, even as the Bank of England prepares to announce its own large interest rate hike Thursday.

“The Fed is having to be cruel in order to restore price stability,” noted Russ Mould, investment director at AJ Bell.

“Higher rates will cause pain to households and businesses, with the jobs market being closely watched for signs of redundancies and hiring freezes.”

Most analysts are predicting that the Fed will announce another 75 basis-point lift, though some have tipped a full percentage-point move.

In the event of no surprises, the US central bank’s forecast and post-meeting comments from boss Jerome Powell will be the main attraction for investors.

“Volumes remain light and the mood cautious, with few looking to take on large positions before hearing what the Fed says,” according to Fiona Cincotta at City Index trading group.

Other central banks are meeting this week. On Tuesday, officials in Sweden surprised markets by unveiling a one percentage-point hike.

Adding to the cautious mood was Vladimir Putin’s announcement of a “partial mobilisation” as Russia’s president upped the ante in his battle against Ukraine.

Putin said he would annex the territories his forces had occupied and backed referendums in four regions in Russian-held parts of Ukraine.

“We will definitely use all means available” to protect Russian territory, he warned, adding: “That’s not a bluff.”

The moves mark an escalation in the seven-month war, which has roiled markets and sparked an energy crisis.

Oil prices surged nearly three percent Wednesday, having wilted in recent months on weaker demand expectations fuelled by recession fears.

Putin’s announcement and possible escalation in the war “raises a whole new set of uncertainties”, Rabobank’s Jane Foley said.

Asian stock markets closed lower Wednesday, reversing Tuesday’s bounce.

- Key figures at around 1100 GMT -

London - FTSE 100: UP 0.7 percent at 7,244.18 points

Frankfurt - DAX: FLAT at 12,668.47

Paris - CAC 40: UP 0.2 percent at 5,991.70

EURO STOXX 50: UP 0.1 percent at 3,469.99

Tokyo - Nikkei 225: DOWN 1.4 percent at 27,313.13 (close)

Hong Kong - Hang Seng Index: DOWN 1.8 percent at 18,444.62 (close)

Shanghai - Composite: DOWN 0.2 percent at 3,117.18 (close)

New York - Dow: DOWN 1.0 percent at 30,706.23 (close)

Pound/dollar: DOWN at $1.1343 from $1.1384 Tuesday

Euro/dollar: DOWN at $0.9928 from $0.9970

Euro/pound: DOWN at 87.52 pence from 87.63 pence

Dollar/yen: UP at 143.88 yen from 143.72 yen

Brent North Sea crude: UP 2.7 percent at $93.10 per barrel

West Texas Intermediate: UP 2.5 percent at $86.00 per barrel