Dollar rises as US debt bill passes House, euro slides ahead of inflation

The dollar rose on Thursday after a vote of approval from the U.S. House to suspend the debt ceiling, though the greenback drifted from a two-month high as investors trimmed bets the Federal Reserve will raise interest rates this month.

The euro fell ahead of euro zone inflation data due at 0900 GMT, which is expected to show price pressure in the block has eased.

A divided U.S. House of Representatives on Wednesday passed a bill to suspend the $31.4 trillion debt ceiling, and the focus now turns to how it will fare in the Democratic-led Senate just days before the federal government is expected to run out of money to pay its bills.

 

"Our view is that ... the U.S. government will avoid a default that could potentially derail the U.S. and also the global economy," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

"I think the dollar can gain a little bit more support on a successful vote today."

The dollar index , which measures the currency against a basket of six peers rose 0.22% to 104.38, and was off a two-month high of 104.7 touched on Wednesday as traders pared back their expectations of another Fed rate hike this month.

 

Fed officials including the vice chair-designate pointed towards a rate hike "skip" in June, giving time for the U.S. central bank to assess the impact of its tightening cycle thus far against still-strong inflation data.

Markets are now pricing in a roughly 37% chance that the Fed will raise rates by 25 basis points at its upcoming meeting, as compared to a near 67% chance a day ago, according to the CME FedWatch tool.

EURO ZONE INFLATION

 

The euro fell 0.12% to $1.0675, towards a two-month low of $1.0635 touched on Wednesday, as the European Central Bank (ECB) could be under less pressure to extend its monetary tightening much further as inflation shows signs of subsiding.

"The inflation data from Spain and Germany for May has already suggested that price pressure is easing notably. That means the euro zone inflation rate due for publication today might also come in slightly weaker than expected," said Antje Praefcke, FX Analyst at Commerzbank.

 

Money markets are pricing in a 85% chance of a 25 bps hike by the ECB when it meets on June 15.

Commerzbank said the market is no longer certain whether there really will be two 25 bps rate steps. "That makes life difficult for the euro at present," said Praefcke.

ECB Vice-President Luis de Guindos said on Thursday that the central bank has already gone through most of its monetary policy tightening though the cycle is not quite over yet.

Sterling slipped 0.2% to $1.2421, the Japanese yen fell 0.38% to 139.81 per dollar.

Japan's financial authorities met earlier this week in the wake of the yen's slide to a six-month low against the dollar. The country's top diplomat said that Japan will closely watch currency moves and won't rule out any options.

The Chinese offshore yuan last bought 7.1320 per dollar, after touching a six-month low in early London trading.

It had briefly gained some support after a private business survey on Thursday showed China's factory activity unexpectedly swung to growth in May from a decline in April.

The yuan had fallen nearly 3% against the dollar in both the onshore and offshore markets in May, as China's post-COVID economic recovery struggles to gain steam.