The US debt drama and the data dollar

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SINGAPORE, May 17 (Reuters) – The dollar held up on Wednesday as traders cut bets on impending U.S. rate cuts following strong consumer spending data, while the greenback also benefited from its safe-haven status as long as the risk of a US default remained.

President Joe Biden and Congressional Republican Kevin McCarthy have moved closer to a deal to raise the US debt ceiling – but nothing is done yet.

While Biden has warned that any default would send the economy into recession, investors fear the global impact could be negative and therefore view the greenback as a safe haven.

The dollar hit a two-week high at 136.69 yen overnight and hovered just below at 136.54 on Asia Day. It also broke above its 50-day moving average against the euro to trade at $1.0866 for the common currency.

“A heavy blow to the world’s largest economy can only send negative shock waves through the global economy and reduce risk appetite, which would thus become a safe-haven event,” said Jane Foley, strategist at Rabobank.

Rabobank expects the euro to fall to $1.06 in six months.

The yen may have drawn some stability from data showing the Japanese economy grew at an annualized rate of 1.6% last quarter, beating analysts’ expectations.

Expectations for short-term US interest rate cuts were dampened by April’s solid increase in consumer spending and hawkish comments from Federal Reserve officials.

Chicago Fed President Austan Goolsbee said it was “far too premature to talk about lowering rates,” and Cleveland Fed President Loretta Mester said rates were not still at a point where the central bank could hold steady, given stubborn inflation.

Two-year US Treasury yields rose seven basis points overnight to 4.12% and benchmark 10-year yields rose 4 basis points to 3.55%, and remained broadly flat. in Asia.

The pricing of interest rate futures implies no possibility of a rate cut in June, compared to a probability of around 17% seen a month ago.

“We expect further modest increases in the dollar as markets continue to lower prices for rate cuts,” said Commonwealth Bank of Australia strategist Joe Capurso. “A rate hike is possible this year, although the hurdle is high.”

The Aussie dollar pared losses from the previous day and, after breaking through its 50-day moving average, settled at $0.6655.

Sterling, at $1.2480, was also under pressure.

The New Zealand dollar was broadly stable at $0.6244 as investors anticipate a 25 basis point interest rate hike next week and possibly one more after that.

“We see a 20% chance of a 50 basis point rise and a 5% chance of a break,” analysts at ANZ Bank said. “Either could backfire by lowering future expectations.”

European inflation data is also expected, although few deviations from the preliminary figures are expected. Data on US mortgages and housing starts are released later in the day.

The Turkish lira, which has been under pressure since the election results left open the possibility of President Tayyip Erdogan extending his rule – and his unorthodox economic policies – hit a new 10-week low at 19.75 to the dollar.

The Thai baht, which initially climbed on strong election results from progressive parties, has fallen around 0.4% as politicians enter what could be a long period of negotiation until a government is formed. .

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Bid rates for currencies at 05:30 GMT

All spots

Tokyo spots

Spots of Europe

Volatilities

BOJ Tokyo Forex Market Information

Reporting by Tom Westbrook; Editing by Stephen Coates

Our standards: The Thomson Reuters Trust Principles.

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