By Peter Nurse

Investing.com - The U.S. dollar rose in early European trading Wednesday, climbing near a 20-year high as Russian President Vladimir Putin raised tensions over Ukraine, and traders awaited another substantial Federal Reserve interest rate hike.

At 03:00 ET (07:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.5% higher at 110.457, close to the two-decade peak of 110.79 reached earlier this month.

Russian President Vladimir Putin declared mobilization of the country's 2 million strong military reserve in a recorded video address earlier Wednesday, confirming his intention to annex those parts of Ukraine currently under Russian occupation.

Putin also raised the geopolitical temperature, making a thinly veiled threat to use the country's nuclear arsenal to defend his conquests in Ukraine, at the same time accusing the West of practicing "nuclear blackmail" against it.

"If Russia’s territorial integrity is threatened we will use all means at its disposal. This is not a bluff," Putin said.

The euro felt the brunt of the losses, with EUR/USD falling 0.7% to 0.9903, falling close to its lowest level just below 0.99 since near the start of September.

The dollar has also benefited from the widely held expectation that the U.S. Federal Reserve will announce an interest rate increase of at least 75 basis points later Wednesday as it attempts to combat stubbornly high inflation.

That said, a full percentage point hike is not completely out of the question as last week’s consumer price index showed inflation remaining near 40-year highs.

"There seems no reason for the Fed to soften the hawkishness shown at the recent Jackson Hole symposium and a 75bp 'hawkish hike' should keep the dollar near its highs of the year," said analysts at ING, in a note.

These expectations pushed yields on the 2-year U.S. Treasury notes up to 3.992% overnight, the highest since 2007, while yields on the benchmark 10-year Treasury rose to 3.604%, the highest since 2011.

USD/JPY fell 0.1% to 143.64, with the yen’s safe haven status helping the Japanese currency even as the rising Treasury yields ramped up the pressure. The yen has dropped around 20% against the dollar this year.

The Bank of Japan holds a policy meeting on Thursday and is widely expected to keep its ultra-easy stimulus settings unchanged even as data released Tuesday showed Japan's core consumer inflation rising to 2.8% in August, hitting its fastest annual pace in nearly eight years.