Dollar steady on mounting Fed hike bets, debt ceiling deal optimism

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SINGAPORE – The dollar held firm on Monday supported by rising expectations of an interest rate hike by the US Federal Reserve, although news that a debt-ceiling deal had been finalized drove some safe-haven bids away from the greenback.

The US dollar hit a six-month high of 140.91 yen in early Asian trade before reversing some of those gains to close at 140.39 yen. It was on track for a monthly gain of about 3% against the Japanese currency.

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The yen’s renewed decline came on the back of rising US Treasury yields, as bets are growing that interest rates in the US will remain elevated for longer.

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Data released on Friday showed that US consumer spending rose more-than-expected in April and inflation rebounded, adding to signs of a still resilient economy.

Yields on US Treasuries jumped on the back of the data, with the two-year yield, which usually reflects near-term interest rate expectations, rising to a two-month high of 4.639% on Friday.

US Treasuries were non-trading in Asia on Monday, due to the Memorial Day holiday in the US, while futures were broadly flat. The implied return for the 10-year futures contract was 3.84%.

The UK market is similarly closed on Mondays for a holiday.

Against the dollar, the euro rose 0.02% to $1.0735, while the British pound fell 0.01% to $1.23495.

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“Whether the dollar sustains the rally we are seeing, I think will depend particularly on the wages data, or the average earnings within the Friday payroll report, and obviously we got CPI ahead of the Fed as well,” said Ray Attrell. , Head of Foreign Exchange Strategy at National Australia Bank (NAB).

“There is still a lot of data that needs to flow under the bridge before we get to the June meeting.”

Money markets are now pricing in a 62% chance that the Fed will raise interest rates by 25 basis points in June, compared to a roughly 26% chance a week ago, according to CME FedWatch.

Debt deal done?

The upbeat mood in Asia was dominated by the news that US President Joe Biden has finalized a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until January 1, 2025.

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On Sunday, Biden said the deal was ready to go to Congress for a vote.

The wave of optimism pushed the risk-sensitive Australian and New Zealand dollars away from six-month lows last week.

The Australian dollar rose 0.41% to $0.6545, while the New Zealand dollar rose 0.29% to $0.60645.

The US Dollar Index was down 0.15% at 104.11, although it remained near last week’s two-month high of 104.42.

“We’ve had a positive risk-averse response so far to news of the debt deal,” said NAB’s Atrell.

“Obviously, this debt deal still needs to get through, but I think the markets are happy to travel assuming it gets done before the new X date.”

U.S. Treasury Secretary Janet Yellen said on Friday that the government will default if Congress does not raise the $31.4 trillion debt ceiling by June 5, after previously saying a default could happen on June 1.

Elsewhere, the Turkish lira remained under pressure at 20.04 against the US dollar, after falling to a record low of 20.06 per dollar on Friday.

President Recep Tayyip Erdogan secured victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.

(Reporting by Ray Wei; Editing by Stephen Coates)