Dollar inches higher on Fed rate expectations, hits 6-month peak vs yen

The US dollar inched higher for a second day on Tuesday - touching a six-month peak against Japan's yen - on expectations that US rates will remain higher for longer, while ongoing debt ceiling negotiations kept investors on edge.

Among a slew of Federal Reserve heavyweights who spoke on Monday, some hinted that the central bank had further to go in tightening monetary policy.

Minneapolis Fed President Neel Kashkari said that US rates may have to go "north of 6 percent" for inflation to return to the Fed's 2 percent target, while St. Louis Fed President James Bullard said the central bank may still need to raise another half-point this year.

 

Against the Japanese yen, the greenback rose to a near six-month peak of 138.88 in Asia trade. The dollar was last 0.1 percent lower at 138.445 yen.

With US policymakers sounding a preference for higher rates, traders ramped up bets that the Fed funds rate will stay elevated, with markets pricing in around a 20 percent chance of a rate hike in June and the Fed funds rate seen at about 4.7 percent in December.

"Hawkish Fed comments have lifted rate hike expectations and that is one reason why the dollar is firmer across the board," said Niels Christensen, chief analyst at Nordea.

 

he euro slipped 0.2 percent to $1.0795 and is down around 2 percent for the month thus far against a stronger dollar, reversing two straight months of gains.

Euro zone business growth slowed slightly more than thought but remained resilient this month as the bloc's dominant services industry lost a little of its shine and the downturn in the manufacturing sector deepened, a survey showed on Tuesday.

Sterling was down 0.3 percent at $1.24.

Flash PMI figures from the UK and United States are due later on Tuesday.

'X-DATE' LOOMS

 

Also on investors' minds were concerns over a looming debt ceiling deadline in the United States, which put a lid on risk sentiment and supported the safe-haven US dollar.

President Joe Biden and House Speaker Kevin McCarthy ended discussions on Monday with no agreement on how to raise the US government's $31.4 trillion debt ceiling and will keep talking with just 10 days before a possible default.

 

"Markets are still expecting some sort of deal to be reached," Nordea's Christensen said.

"An agreement should spark some more risk-on sentiment which could be negative for the dollar," he added.

Short-end US Treasury yields have jumped still, reflecting market jitters, with the yield on the one-month Treasury bill last at 5.881 percent. Yields rise when bond prices fall.

The yield on the two-month Treasury bill rose to a roughly three-week high of 5.556 percent.

Against a basket of currencies , the US dollar rose 0.1 percent to 103.41, not far from a roughly two-month high of 103.63 hit last week.

The Aussie slipped 0.4 percent to $0.6625, while the kiwi fell 0.4 percent to $0.6258.

The resilient dollar kept the offshore yuan pinned near its recent five-month low and it last bought 7.0661.

China on Monday kept its benchmark lending rates unchanged, as a weakening yuan and widening yield differentials with the US limited the scope for any substantial monetary easing to shore up the country's post-COVID economic recovery.