Debt ceiling hopes to lift dollar to seven-week high

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LONDON – The US dollar hit a seven-week high on Thursday after President Joe Biden and top US Republican congressman Kevin McCarthy worked to avoid a severe default, while investors eased expectations of easing by the Federal Reserve.

Biden and McCarthy on Wednesday emphasized the government’s determination to reach an agreement to raise the $31.4 trillion debt ceiling soon, after agreeing to face-to-face negotiations a day earlier after a lengthy stalemate. many months long.

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“In the short term, the debt ceiling is in favor of the dollar,” said Viraj Patel, global macro strategist at Vanda Research.

“If the situation gets worse, you will see a hard landing globally and you will want to own the dollars. If it gets resolved, people will change their expectations for the Fed and we could see another rate hike,” he added.

Traders are pricing in about a 20% chance of the Federal Reserve raising interest rates at its June meeting. About a month ago, the markets priced in about a 20% chance of a cut.

The rate that traders value for the December Fed meeting is 4.525%, implying an easing of about 55 basis points by year-end, down about 5 basis points from the previous day.

The dollar index rose 0.3% to 103.17, the highest level since March 27. It was most recently 103.10.

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The euro fell as much as 0.3 percent to $1.0805, a six-week low, while the pound was just above Wednesday’s three-week low of $1.2422.

The dollar also rose to a five-month high of 137,935 yen, having risen for six straight trading sessions, its longest streak since October.

“The dollar/yen continues to be the market’s risk-loving pair, so that’s helped by some positive developments in debt ceiling talks,” said Carol Kong, a currency strategist at Singapore. , we have seen the dollar/yen paring some of the recent losses.” Commonwealth Bank of Australia (CBA).

Action in Asia was partly led by the Australian dollar, after data on Thursday showed Australian employment unexpectedly fell in April after two months of excessive gains. The unemployment rate also rose in a sign that the red-hot labor market may be cooling off.

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The Australian dollar fell about 0.4% after the data was released and was 0.3% lower last at $0.6640, on expectations the Reserve Bank of Australia will tighten further.

“Today’s jobs data in Australia could complicate any upside plans,” said Francesco Pesole, FX strategist at ING.

“However, we must bear in mind that there is almost nothing that can be priced in when the RBA tightens, so the possibility of a dovish reprice to reach the AUD is limited.”

The kiwi fell 0.1% to $0.6240 after New Zealand posted a worse-than-expected budget deficit as the economy slowed and the tax cuts hit their coffers, prompting the government to The Labor government must tighten spending as their spending plans are expected to create inflationary pressures.

China’s yuan fell to its lowest level against the dollar since December, after weakening past the key $7 level on Wednesday for the first time in five months, amid local tensions. politics and many signs that China’s post-COVID recovery is losing momentum.

(Reporting by Samuel Indyk in London and Rae Wee in Singapore; editing by Shri Navaratnam, Stephen Coates, Christina Fincher and Sharon Singleton)