Dollar holds gains as debt ceiling optimism continues

19 May 2023

The Dollar maintained six-month highs against the Yen and seven-week highs against the Euro on Friday, as optimism over the US debt ceiling standoff continued.

Negotiators told President Biden on Friday that they were making “steady progress” in discussions with Republicans, aimed at avoiding a US default.

In addition, data indicating the US labour market remains tight also fuelled expectations the Federal Reserve may hike rates again in June to curb inflation.

The Dollar index - measuring the currency against six rivals – traded at a two-month high, after rising close to 2.5% over the past fortnight, Reuters news agency reports.

“The message from the Fed has been really hawkish. We know there has been this divergence between what the market's expecting and what the Fed has actually been saying and that was always going to need to be reconciled at some point. We're starting to see this play out in the FX market now,” said City Index strategist, Fiona Cincotta.

“As far as expectations for a June rate hike are concerned, those have risen significantly in the last week. The market is pricing in a 40% chance and that is up from 15% a week ago,” she added.

Despite losing some ground on Friday, the greenback held firm. USD was down 0.4% against the Yen at 138.19 Yen, after reaching a six-month top of 138.745 previously.

Elsewhere, the Euro was flat on Friday, trading near a seven-week low of $1.0773, whilst Sterling edged down 0.1% to $1.239, its lowest in a month, the Reuters report adds.

In Australia, the Dollar increased 0.3% to $0.6644, whilst the New Zealand Dollar gained 0.7% to $0.6258.

Moving to China, the Yuan fell to a December low of 7.0365 per Dollar. “(Yuan) softness started after China activity data disappointed. The depreciation gathered traction following the breach of 7.00 and there appears little signs of pushback from policymakers on the rapid pace of decline,” said Christopher Wong, currency strategist at OCBC.