Safe-haven US dollar climbs to 6-week high, US debt risks in focus
THE US dollar rose on Wednesday (May 17), benefiting from its safe-haven status amid the risk of a US debt default, and as traders trimmed bets on a Federal Reserve (Fed) rate cut any time soon following solid US consumer spending data.
US President Joe Biden and the senior congressman, Republican Kevin McCarthy, have edged closer to a deal to raise the US debt ceiling, but nothing is clinched yet.
Biden said any default would land the economy in recession, but investors also fear the impact globally would be negative.
Against a basket of peers, including the euro, yen and sterling, the US dollar index rose 0.25 per cent to 102.86, after earlier touching its highest since early April.
It rose 0.5 per cent against the yen to a two-week peak of 137.17 and 0.15 per cent against sterling to US$1.2469, after hitting its highest versus the British currency since April 26.
“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 strategist Jane Foley said.
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Expectations for near-term US interest rate cuts were dampened by a solid increase in April consumer spending, and by comments from Fed officials. 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.
Interest rate futures pricing implies no chance of a rate cut in June, down from about a 17 per cent chance seen a month ago.
“We expect some modest further increases in the US dollar as markets continue to take out pricing for rate cuts,” said Commonwealth Bank of Australia strategist Joe Capurso. “A rate hike is possible this year, though the hurdle is high.”
The euro fell to a six-week low against the US dollar, down 0.3 per cent at US$1.0831.
Eurozone inflation accelerated last month, Eurostat said on Wednesday, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations sharing the euro.
Turkey’s lira, which has been under pressure since election results leave open the possibility of President Tayyip Erdogan extending his time in office – and his unorthodox economic policies – hit a 10-week low of 19.75 per US dollar.
The Thai baht, which had initially climbed on strong election results from progressive parties, slipped 0.7 per cent as politicians enter what could be a protracted period of dealmaking until a government is formed. REUTERS
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