Dollar strengthens as persistent inflation fuels speculation of Fed rate hikes and debt ceiling deal boosts optimism

SINGAPORE: The dollar strengthened on Monday as US economic resilience boosted market expectations of another Fed rate hike and news of a debt ceiling deal added some risk-on moods.

The US dollar hit a six-month high of 140.91 yen in the early days of Asian trading, and was headed for a monthly gain of more than 3% against the Japanese currency.

Rising U.S. Treasury yields are driving the yen down again as there is growing speculation that U.S. interest rates will remain high for an extended period of time.

Data released on Friday showed that US consumer spending rose more than expected in April and inflation accelerated, adding to signs that the economy is still showing resilience.

The data sent U.S. Treasury yields sharply higher, with the two-year yield, which usually reflects short-term interest rate expectations, rising more than 10 basis points on Friday to a two-month high of 4.639%.

Physical Treasury bonds were not traded in Asia on Monday due to the US Memorial Day holiday, but futures markets were broadly stable. The 10-year futures implied yield was 3.84%.

The UK market will likewise be closed on Monday for a public holiday.

Against the dollar, the euro fell 0.13% to $1.0719 and the pound fell 0.07% to $1.2342.

“I think the dollar’s ability to sustain the rally we’re seeing will depend on average incomes, especially wages and jobs on Friday,” Ray Attrill said. there is,” he said. , Head of FX Strategy at National Australia Bank (NAB).

“By the June meeting, there is still quite a lot of data flowing under the bridge.”

Money markets are now pricing in a nearly 68% chance that the Fed will raise rates by 25 basis points in June, compared with about 17% a week ago, according to the CME FedWatch Tool.

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Risk sentiment in Asia soared last weekend with news that US President Joe Biden and House Speaker Kevin McCarthy had finalized a budget deal that would suspend the $31.4 trillion debt ceiling until 1 January 2025. increased.

Biden said on Sunday he was ready to move the deal to a vote in Congress.

The risk-sensitive Australian and New Zealand dollars edged higher, with the Australian dollar up 0.17% to $0.6529.

Kiwi rose 0.08% to $0.6052.

“So far we have had a risk-positive reaction to the news of the debt deal,” said NAB’s Atrill.

“Clearly there is still a need to cross the line to resolve this debt deal, but I think the market is happy to move on the assumption that the deal will be completed by the new X date.”

U.S. Treasury Secretary Janet Yellen said on Friday that the government would default if Congress did not raise the $31.4 trillion debt ceiling by June 5, arguing as early as June 1. also said that a default could occur.

Against a basket of currencies, the US dollar rose 0.02% to 104.29.

Elsewhere, the Turkish lira came under pressure to 20.04 lira to the dollar after falling to a record low of 20.06 lira on Friday.

President Tayyip Erdogan secured victory in Sunday’s presidential election, extending his increasingly authoritarian rule to 30 years.