Dollar gains as debt deal hopes rekindle hawkish Fed bets

Shafaq News / The dollar firmed to a near six-month peak against the yen on Friday and pushed the euro to an over seven-week low, as optimism over debt ceiling talks in Washington raised expectations U.S. interest rates will stay higher for longer.

Democratic negotiators told President Joe Biden on Friday that they are making "steady progress" in talks with Republicans aimed at avoiding a U.S. default, just days after Biden and top U.S. congressional Republican Kevin McCarthy underscored their determination to strike a deal soon to raise the government's $31.4 trillion debt ceiling.

That eased fears of an unprecedented and economically catastrophic default, leading markets to revise their expectations of where U.S. interest rates could go.

At the same time, data pointing to a still-tight labour market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also raised expectations that the Federal Reserve could deliver another rate hike next month in a bid to tame inflation.

The dollar stayed elevated in Asia trade on Friday and last bought 138.47 yen <JPY=EBS>, having risen to a near six-month high of 138.75 yen in the previous session.

The greenback was eyeing a weekly gain of about 2% against the Japanese currency, its largest since February.

The euro fell to a more than seven-week low of $1.0760, while the U.S. dollar index rose 0.07% to 103.57, flirting with Thursday's two-month high of 103.63.

The index was headed for a second straight weekly gain of nearly 0.9%.

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

"It does remove one obstacle to the Fed continuing to raise rates."

Two Fed policymakers had said on Thursday that U.S. inflation does not look like it is cooling fast enough to allow the Fed to pause its tightening campaign.

Money markets are now pricing in a 33% chance that the Fed could raise rates by another 25 basis points next month, compared with just about a 10% chance a week ago, according to the CME FedWatch tool.

Traders have also pared expectations on the scale of rate cuts expected later this year, with rates seen just above 4.6% by December.

U.S. Treasury yields have climbed on the back of the hawkish Fed repricing and amid a pick up in risk sentiment. Yields rise when bond prices fall.

The two-year Treasury yield , which typically moves in step with interest rate expectations, last stood at 4.2510%, while the benchmark 10-year yield was last at 3.6402%.

Among other currencies, sterling fell 0.1% to $1.2396.

The Aussie <AUD=D3> edged 0.2% higher to $0.6635, having slid on Thursday against a stronger dollar and on data showing that Australia's employment unexpectedly dipped in April.

In Asia, Japan's core consumer inflation stayed well above the central bank's 2% target in April and a key index stripping away the effects of fuel hit a fresh four-decade high, keeping alive expectations that the central bank could tweak its massive stimulus this year.

In China, the yuan extended its recent slide, with both the onshore and offshore yuan at their lowest levels since last December amid dollar strength and worries about China's sputtering economic recovery.

"(Yuan) softness started after China activity data disappointed," said Christopher Wong, a currency strategist at OCBC. "The depreciation gathered traction following the breach of 7.00 (per dollar) and there appears little signs of pushback from policymakers on the rapid pace of decline."

(Reuters)