U.S. debt drama and data hoist dollar

2023-05-17 13:49

By Tom Westbrook SINGAPORE The dollar held firm on Wednesday, as traders trimmed bets on imminent U.S. rate

By Tom Westbrook

SINGAPORE The dollar held firm on Wednesday, as traders trimmed bets on imminent U.S. rate cuts following solid consumer spending data, while the greenback also benefitted from its status as a safe-haven so long as risk of a U.S. debt default remained.

President Joe Biden and top congressional Republican Kevin McCarthy have edged closer to a deal to raise the U.S. debt ceiling - but nothing is clinched yet.

While Biden warned that any default would land the economy in recession, investors fear the impact globally would be negative, and consequently see the greenback as a safe haven.

The dollar hit a two-week peak of 136.69 yen overnight and hovered just below that at 136.54 in the Asia day. It has also broken above its 50-day moving average against the euro to trade at $1.0866 to the common currency.

"A crushing blow to the world's number one economy can only have negative shockwaves to the global economy, and reduce risk appetite, which would thus become a safe-haven event," Rabobank strategist Jane Foley said.

Rabobank forecast the euro falling to $1.06 in six months.

The yen may have drawn some stability from data showing Japan's economy grew at an annualised rate of 1.6% in the last quarter, beating analysts expectations.

Expectations for U.S. interest rate cuts any time soon were dampened by the solid increase in April consumer spending, and by hawkish comments from Federal Reserve officials.

Chicago Fed President Austan Goolsbee said it was "far too premature to be talking about rate cuts", and Cleveland Fed President Loretta Mester said rates were not yet at a point where the central bank could hold steady, given stubborn inflation.

Two-year U.S. Treasury yields rose seven basis points overnight to 4.12% and benchmark 10-year yields rose 4 bps to 3.55%, and held broadly steady in Asia.

Interest rate futures pricing implies no chance of a rate cut in June, down from about a 17% chance seen a month ago.

"We expect some modest further increases in the dollar as markets continue to take out pricing for rate cuts," said Commonwealth Bank of Australia strategist Joe Capurso. "A rate hike is possible this year, though the hurdle is high."

The Australian dollar nursed the previous day's losses and, having fallen through its 50-day moving average, sat at $0.6655.

Sterling, at $1.2480, was also under some pressure.

The New Zealand dollar was broadly steady at $0.6244, with investors looking ahead to a 25 bp interest rate hike next week and perhaps one more after that.

"We see a 20% chance of a 50 bp hike and a 5% chance of a pause," analysts at ANZ Bank said. "Either could backfire by driving down future ... expectations."

European inflation data is also due, though little deviation from preliminary figures is expected. U.S. mortgage and housing starts data is published later in the day.

Turkey's lira, which has been under pressure since election results leave open the possibility of President Tayyip Erdogan extending his rule - and his unorthodox economic policies - hit a fresh 10-week low of 19.75 per dollar.

Thailand's baht, which had initially climbed on strong election results from progressive parties, slipped about 0.4% as politicians enter what could be a protracted period of dealmaking until a government is formed. [EMRG/FRX]

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Currency bid prices at 0530 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.0860 $1.0862 -0.01% +0.00% +1.0873 +1.0860

Dollar/Yen

136.7450 136.3500 +0.29% +0.00% +136.7700 +136.3900

Euro/Yen

148.50 148.15 +0.24% +0.00% +148.5500 +148.0800

Dollar/Swiss