The US dollar rose for a second day on Tuesday (May 23), briefly touching a six-month peak against Japan’s yen, on expectations that US interest 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 per cent“ for inflation to return to the Fed’s 2 per cent target, while St Louis Fed president James Bullard said the central bank may still need to raise by another half-point this year.

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 almost a 30 per cent chance of a rate hike in June and the Fed funds rate seen at about 4.75 per cent 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.

The US dollar index, which measures the greenback against a basket of major peers, rose 0.3 per cent to 103.53, not far from a roughly two-month high of 103.63 hit last week.

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Meanwhile, eurozone business growth slowed slightly more than expected, 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.

The euro slipped 0.3 per cent to US$1.0778 and is down over 2 per cent for the month thus far, reversing two straight months of gains.

Sterling shrugged off Britain’s growth upgrade from the International Monetary Fund and slipped as much as 0.5 per cent to a one-month low of US$1.2373 after Tuesday’s Purchasing Managers’ Index (PMI) survey painted a contrasting picture for British businesses with services companies reporting growth in May, while manufacturing businesses shrank again.

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

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 US$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 rising to a record 5.904 per cent. Yields rise when bond prices fall.

Against the Japanese yen, the US dollar rose to a near six-month peak of 138.88 in Asian trade but was last 0.1 per cent lower at 138.5 yen.

The Aussie slipped 0.5 per cent to US$0.6623, while the New Zealand dollar fell 0.5 per cent to US$0.6252.

The resilient US dollar kept the offshore yuan pinned near its recent five-month low, and it last bought 7.0675 yuan.

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