By Kevin Buckland
TOKYO (Reuters) – The dollar recovered losses against the yen and the euro on Monday after a sudden collapse in US debt ceiling negotiations and after Federal Reserve Chairman Jerome Powell signaled his preference for slow rate hikes.
The dollar fell 0.15% to 137.715 yen at the start of the week, after snapping a six-day winning streak on Friday and pulling back from a six-month peak.
The euro rose 0.14% to $1.0822, extending Friday’s advance, when it rebounded from a seven-week low.
Investors are now awaiting an important meeting between US President Joe Biden and Republican House Speaker Kevin McCarthy to discuss the debt ceiling on Monday.
Negotiations between the two sides came to an abrupt halt on Friday as the Republican negotiators walked out of the meeting. Although talks eventually resumed, neither side reported any progress, sending the dollar lower.
Many currency analysts say that brinkmanship is expected to head towards an alleged “tenth date” in early June, when the Treasury is likely to run out of money.
“Have we not seen this movie before?” National Australia Bank strategist Rodrigo Cattrell said in a note to a client, while Westpac strategist Sean Callow called it a “hiccups.”
“The outlines of a deal are still on the horizon,” Kalou said.
Instead, the dollar is likely to be driven by Fed expectations, and “Powell’s preference for a pause in June should outweigh any hawkish remarks from regional Fed chiefs, leaving DXY as a sell-off on rallies,” Calo added, referring to the U.S. dollar index.
Powell told a central bank conference in Washington on Friday that tightening credit conditions meant that “our policy rate may not need to go up as high as it would have to achieve our goals,” though he repeated that decisions would be made “by meeting.” “
Money market traders cut their bets on the June 14 rally to just 9%.
The dollar index, which measures the greenback against six major peers, fell 0.04% to 103.00, after reaching 103.63 last week for the first time since March 20.
Westpac’s Callow predicts that the index could drop towards 101 in the coming days or weeks, “particularly given the ECB’s continued grit on inflation.”
European Central Bank President Christine Lagarde said on Friday that officials need to “end up” for “sustainably high interest rates” in order to meet the inflation target.
Elsewhere, the pound rose 0.14% to $1.2464, extending its recovery from last week’s three-week low.
The Australian dollar rose 0.06% to $0.6655, while the New Zealand dollar rose 0.13% to $0.62835.
The Chinese yuan was little changed in offshore trade at 7.0334, after rebounding on Friday from a nearly six-month low of 7.0750 per dollar, buoyed by comments from the central bank that it would curb large exchange rate swings.
(Reporting by Kevin Buckland; Editing by Sam Holmes)