Dollar softer as US debt ceiling crisis unresolved, inflation data eyed

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SINGAPORE – The dollar weakened broadly on Wednesday after US President Joe Biden and top lawmakers failed to break a deadlock over the debt ceiling crisis, though currency moves were marginal amid caution ahead of US inflation data later in the day.

Biden and House Speaker Kevin McCarthy remained divided over increasing the US debt limit of $31.4 trillion after talks on Tuesday, with just weeks left before the US is forced into an unprecedented default.

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However, the two agreed to hold more talks and committed their aides to daily discussions about areas of potential agreement. Biden, McCarthy and three top congressional leaders are scheduled to meet again on Friday.

The US currency slipped in early Asian trade, with the euro rising 0.11% to $1.0971 and the pound sterling up 0.1% to $1.2634.

The kiwi rose 0.05% to $0.6338.

“There’s been a lot of interest lately in debt ceiling issues,” said Carol Kong, currency analyst at Commonwealth Bank of Australia (CBA). “I don’t think it’s going to be resolved any time soon. Normally, in the past, issues were usually resolved at the last minute.

“And that means there could be more volatility in the markets…and I think the dollar could weaken more, as we’ve seen in the past.”

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Against a basket of currencies, the US Dollar Index fell 0.07%, to 101.55.

US inflation data was also a concern for investors, with economists polled by Reuters expecting a 5.5% year-on-year increase in core consumer prices for the month of April.

The stronger-than-expected reading could be a headache for the Federal Reserve, which last week opened the door to a pause in its aggressive tightening cycle, having hiked interest rates 10 times in a row since March 2022.

“The bar is high for the Fed’s response to data surprises in either direction,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank.

“Having completed a 500 basis point rate hike and anticipating some credit tightening from a regional interbank shake-up, the Fed is unlikely to tighten further than just ‘fixed’ inflation, instead requiring a re-acceleration of inflation.” .

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Money markets are pricing in a roughly 82% chance that the Fed will keep interest rates unchanged at its next meeting in June, and expect rate cuts to begin in July and through the end of the year.

Growing expectations that the Fed will start cutting interest rates later this year has been fueled by the recent squeeze in the banking sector that resulted from the Silicon Valley bank collapse in March.

Elsewhere, the Japanese yen rose 0.1% to 135.11 against the dollar.

Bank of Japan (BOJ) Governor Kazuo Ueda said on Tuesday that the Bank of Japan would end its policy of yield curve control and then start shrinking its balance sheet once inflation is likely to hit its 2% target sustainably, though his comments did little to to raise the yen. .

“What Ueda said was not surprising at all,” said Kong of the CPA. “I think the markets are already expecting the Bank of Japan to make some moves.”

The Australian dollar was last up 0.08%, at $0.67675.

Australia’s Labor government on Tuesday announced its first budget surplus in 15 years, as strong job growth and bumper mining profits swelled its coffers.

(Reporting by Ray Wei; Editing by Edwina Gibbs)