Dollar buoyed by hawkish Fed expectations as debt deal looms

Dollar buoyed by hawkish Fed expectations as debt deal looms


By RaeWee

SINGAPORE (Reuters) – The dollar strengthened near a six-month high against the yen on Friday on rising US Treasury yields, as optimism over Washington’s debt ceiling talks raised expectations of higher interest rates for an extended period of time .

US Congress President Joe Biden and Kevin McCarthy earlier this week underscored their determination to close a deal soon to raise the government debt ceiling to $31.4 trillion, hoping to finalize a deal after Biden returns on Sunday of the Group of Seven meeting in Japan.

The news helped allay fears of an unprecedented and economically catastrophic US debt default, prompting markets to revise their expectations of where US interest rates could head.

At the same time, data pointing to a still tight labor market, with the number of Americans filing new jobless claims falling more than expected last week, also bolstered expectations that the Federal Reserve could hike rates again next month in an effort to curb inflation .

Two Fed policymakers also said on Thursday that US inflation does not appear to be cooling fast enough to allow the Fed to pause its rate hike campaign.

The dollar remained high in early Asian trading on Friday, last buying at 138.40 yen after rising to a six-month high of 138.75 yen in the previous session.

The greenback saw nearly 2% weekly gains against the Japanese currency, its biggest since February.

Similarly, the US dollar index was last at 103.46, flirting with Thursday’s two-month high of 103.63, and was on track for a second straight weekly gain of more than 0.7%.

“Optimism about the debt ceiling (talks) has contributed to a repricing for the Fed…the fact that (a deal) would effectively remove a major weight on the economy,” said Ray Attrill, head of FX strategy at National Australia Bank ( NBB).

“It removes one obstacle for the Fed to raise rates further.”

Money markets are now pricing in a 39% chance that the Fed could raise rates by another 25 basis points next month, compared to a roughly 10% chance a week ago, according to the CME FedWatch tool.

Traders have also revised their expectations about the size of interest rate cuts expected later this year, with interest rates just above 4.6% in December.

US Treasury yields have risen on the back of the Fed’s aggressive rate revisions and rising risk sentiment. Yields rise when bond prices fall.

The yield on two-year government bonds, which tends to move in line with interest rate expectations, last stood at 4.2581%, moving away from a low of 3.964% at the start of the week.

The 10-year benchmark return was 3.6476% last year, after rising nearly 20 basis points this week.

In other currencies, the euro was up 0.06% to $1.0777, but languished from the previous session’s near two-month low of $1.07625.

Sterling gained 0.05% to $1.2415, after falling about 0.6% on Thursday.

The Aussie rose 0.17% higher to $0.6633 after sliding against a stronger dollar on Thursday and on data showing Australian employment fell unexpectedly in April.

In Asia, Japan’s core consumer prices rose 3.4% in April from a year earlier as price increases broadened, data showed Friday, casting doubt on the central bank’s view that inflation will ease later this year. slowing below its 2% target as cost pressures ease.

“I really think the numbers mean the June and July meetings are live for a possible YCC adjustment,” NAB’s Attrill said, referring to the Bank of Japan’s controversial yield curve management policy.

(Reporting by Rae Wee; editing by Sam Holmes)