© Reuters. FILE PHOTO: An illustration showing a US $100 banknote is taken in Tokyo on August 2, 2011. REUTERS/Yuriko Nakao/File Photo
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By Dara Ranasinghe
LONDON (Reuters) – The dollar fell on Monday, retreating from its highest level in six months against the yen, as the US debt ceiling deal raised risk appetite in global markets and reduced the dollar’s attractiveness as a safe haven.
US President Joe Biden on Sunday finalized a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025, and said the deal was ready to go to Congress for a vote.
And after briefly touching a six-month high of 140.91 yen during Asian trade, the dollar drifted lower, last falling nearly a third of a percent at 140.17 yen.
The pair, which measures the value of the US unit against a basket of other major currencies, was also softer around 104.23 but not far from last week’s two-month highs.
The decline in the safe-haven dollar came as global stocks rebounded on positive news from Washington, although trade was weak overall with parts of Europe, including Britain, on holiday with the United States.
“The initial risk-on reaction is likely as the default cloud recedes in the US,” said Charu Chanana, market analyst at Saxo Markets in Singapore.
“But the focus will quickly shift to the fact that getting the deal is only a step in the process and that agreement from both the House and Senate by June 5th is still a big ask.”
The agreement will suspend the debt limit until January 1, 2025, and the spending cap in the 2024 and 2025 budgets.
Spanish elections
In Europe, the euro fell 0.2% to $1.0709, and there was little immediate reaction to news of an early election in Spain.
Spanish Prime Minister Pedro Sanchez said on Monday that the poll will take place on July 23 after his left-wing coalition government suffered heavy losses in the regional poll on Sunday.
The upbeat sentiment towards the world pushed the risk-sensitive Australian and New Zealand dollars away from six-month lows last week.
It rose 0.35% to $0.6541, while it rose 0.2% to $0.6058.
“We’ve had a positive risk-averse response so far to the news of the debt deal,” said Ray Attrell, head of foreign exchange strategy at National Australia Bank (OTC:).
“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.”
US 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 earlier saying a default could happen on June 1.
Talk that the US rate hike cycle may not end as soon as hoped given that signs of economic strength have boosted the dollar and could support the currency even as concerns about the US debt ceiling recede.
The dollar was on track for a monthly gain of about 3% against the yen. The dollar index rose 2.5% in May.
Data on Friday showed that US consumer spending rose more-than-expected in April and inflation picked up, adding to signs of a still resilient economy.
Money markets rate about 62% likely that the Fed will raise interest rates by 25 basis points in June, up from about 26% last week.
Elsewhere, the Turkish lira touched a record low of 20.10 per dollar after President Recep Tayyip Erdogan secured victory in the country’s presidential elections on Sunday, extending his increasingly authoritarian rule into a third decade.
Meanwhile, it fell 0.5% to $27,932, down from a three-week high it hit earlier.
