Data and debt ceiling hoist dollar

By Tom Westbrook

SINGAPORE (Reuters) – The dollar was firm on Wednesday, supported by a safety bid as the U.S. hurtled toward its borrowing limit and boosted after solid economic data had traders trimming bets on imminent rate cuts.

The dollar hit a two-week peak of 136.69 yen overnight and hovered just below that at 136.35 early in the Asia session. It also broke above its 50-day moving average against the euro to trade at $1.0866 per euro.

President Joe Biden and top congressional Republican Kevin McCarthy have edged closer to a deal to avoid a U.S. debt default – but nothing is clinched yet and ironically the risk the U.S. fails to pay debts has put a bid under the currency.

“The dominance of the dollar in the global payments system provides a strong explanation as to why,” Rabobank strategist Jane Foley said.

“A crushing blow to the world’s number one economy can only have negative shockwaves to the global economy, and reduce risk appetite, which would thus become a safe-haven event.”

Rabobank forecast the euro falling to $1.06 in six months.

Data showed Japan’s economic growth, at an annualised 1.6%, markedly beat market expectations last quarter – perhaps lending some stability to the yen which was been falling as higher U.S. yields have supported the dollar.

Data showed U.S. consumer spending appeared to have increased solidly in April, which together with hawkish remarks from Federal Reserve officials weighed on bonds and against expectations that interest rate cuts are coming soon.

Chicago Fed President Austan Goolsbee said it was “far too premature to be talking about rate cuts”, and Cleveland Fed President Loretta Mester said rates were not yet at a point where the central bank could hold steady, given stubborn inflation.

Two-year yields rose seven basis points overnight to 4.12% and benchmark 10-year yields rose 4 bps to 3.55%. Interest rate futures pricing implies no chance of a rate cut in June, down from about a 17% chance seen a month ago.

The Australian dollar fell 0.7% and through its 50-day moving average and last held at $0.6659. Sterling fell about 0.4% and last bought $1.2485.

“Market participants continue to lower pricing for near term rate cuts by the FOMC,” said Commonwealth Bank of Australia (OTC:) strategist Joe Capurso.

“We expect some modest further increases in the dollar as markets continue to take out pricing for rate cuts. A rate hike is possible this year, though the hurdle is high.”

The New Zealand dollar was broadly steady at $0.6239, with investors looking ahead to a 25 bp interest rate next week and perhaps one more after that.

“We see a 20% chance of a 50 bp hike and a 5% chance of a pause,” analysts at ANZ Bank said. “Either could backfire by driving down future … expectations.”

European inflation data is also due, though little deviation from preliminary figures is expected. U.S. mortgage and housing starts data is published later in the day.

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Currency bid prices at 0043 GMT

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Euro/Dollar

$1.0868 $1.0862 +0.06% +1.43% +1.0869 +1.0862

Dollar/Yen

136.3550 136.3500 +0.06% +3.96% +136.4650 +136.4350

Euro/Yen

148.20 148.15 +0.03% +5.63% +148.2900 +148.0800

Dollar/Swiss

0.8960 0.8966 -0.05% -3.08% +0.8965 +0.8960

Sterling/Dollar

1.2486 1.2487 -0.01% +3.24% +1.2490 +1.2481

Dollar/Canadian

1.3474 1.3479 +0.01% -0.51% +1.3480 +1.3480

Aussie/Dollar

0.6657 0.6654 +0.05% -2.34% +0.6661 +0.6653

NZ

Dollar/Dollar 0.6239 0.6231 +0.13% -1.75% +0.6242 +0.6228

All spots

Tokyo spots

Europe spots

Volatilities

Tokyo Forex market info from BOJ

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