Dollar eyes third weekly gain as higher US rate expectations gather steam

The dollar fell on Friday but remained near a two-month high against its major peers, supported by expectations that US interest rates may remain high for longer.

Debt ceiling negotiations between US President Joe Biden and Republican Congressman Kevin McCarthy also continued to cloud the market mood, although news that the two were close to a deal helped investor sentiment and caused the dollar to halt its recent rally.

The dollar fell from its highest level in six months against the yen in Asian trading, and last settled at 139.77, after reaching 140.23 yen in the previous session, the highest level since November.

Against a basket of currencies, the US dollar fell by 0.13 percent to 104.09, compared to a two-month high on Thursday at 104.31.

However, the index was on track for a third consecutive weekly gain of more than 0.8 percent, as traders raised their expectations for how much higher prices could go in the United States.

“The recent moves in currencies have been mainly driven by the sharp repricing of FOMC policy,” said Carol Kong, currency analyst at Commonwealth Bank of Australia (CBA).

Money markets are now pricing in a 40 per cent chance that the Fed will raise interest rates by another 25 basis points at the policy meeting next month, while expectations that the Fed will start cutting rates later this year have been tempered.

Data released Thursday showed that the number of Americans filing new applications for unemployment benefits rose moderately last week to 229,000, less than expected.

The British pound and the euro were struggling to recover their losses against the strong dollar.

Sterling rose 0.13 percent to $1.2337, although it was still on track for a weekly loss of more than 0.8 percent. The euro rose 0.15 percent to $1.0741, but it was not far from a two-month low of $1.0708 hit in the previous session.

The single currency was also affected by the confirmation that Germany, Europe’s largest economy, slid into recession in early 2023.

Among other currencies, the Australian dollar rose 0.22%, last at $0.6520. It fell to a more than six-month low of $0.6490 earlier in the session, weighed down by more pressure from China’s faltering post-COVID economic recovery.

“Near-term data for China will continue to be very weak and continue to point to a weak recovery in consumption,” CBA’s Kong said. “This will be another weight for the Aussie.”

The Australian dollar is often used as a liquid proxy for the Chinese yuan.

The kiwi rose 0.15 percent to $0.6071, although it was heading for a weekly loss of more than 3 percent, the biggest loss since September, after the Reserve Bank of New Zealand surprised markets earlier this week by indicating that it had finished tightening. .

The Chinese yuan has rebounded from its lowest level in nearly six months against the dollar as some state-owned banks sold the greenback to prevent the yuan from depreciating further.

“The general depreciation of the renminbi is back again,” said Alvin Tan, Head of Asia Currency Strategy at RBC Capital Markets.