US dollar nudges lower as debt-ceiling deal dents safe-haven appeal
THE greenback nudged lower on Monday (May 29), pulling back from six-month peaks against the yen, as a US debt-ceiling deal lifted risk appetite across world markets and dented the currency’s safe-haven appeal.
US President Joe Biden on Sunday finalised a budget agreement with House Speaker Kevin McCarthy to suspend the US$31.4 trillion debt ceiling until Jan 1, 2025. He also said the deal was ready to move to Congress for a vote.
Having briefly touched a six-month high of 140.91 yen during Asia trade, the US dollar drifted lower and was last down 0.25 per cent at 140.25 yen.
The US dollar index, which measures the greenback’s value against a basket of other major currencies, was also a touch softer around 104.22, but not far from last week’s two-month peaks. The index has gained 2.5 per cent in May.
The pull-back in the safe-haven US dollar came as world stocks rallied on the positive news from Washington, although trade was generally subdued with parts of Europe, including Britain, on holiday. Monday was also a holiday in the US.
“An initial risk-on reaction is likely as the cloud of US default has retreated,” said Charu Chanana, a market strategist at Saxo Markets in Singapore.
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“But focus will quickly turn to the fact that getting the deal is only a step in the process and an agreement from both the House and Senate by Jun 5 is still a big ask.”
The agreement would suspend the debt limit through Jan 1, 2025; cap spending in the 2024 and 2025 budgets; claw back unused Covid funds; speed up the permitting process for some energy projects; and include extra work requirements for food aid programmes for poor Americans.
In Europe, the euro was down just 0.14 per cent at US$1.0717, showing little immediate reaction to news of a snap election in Spain.
Spanish Prime Minister Pedro Sanchez said on Monday that the vote would take place on Jul 23 after his left-wing coalition government suffered heavy losses in regional ballots on Sunday.
Upbeat world sentiment pushed the risk-sensitive Australian and New Zealand dollars off last week’s six-month lows. The Aussie rose 0.3 per cent to US$0.6539, while the kiwi edged 0.2 per cent higher to US$0.6058.
“We’ve got a risk-positive response so far to the debt deal news,” said Ray Attrill, head of FX strategy at National Australia Bank.
“Obviously there’s still the need to get this debt deal over the line, but I think markets are happy to travel on the presumption that it will get done before the new X-date.”
On Friday, US Treasury Secretary Janet Yellen said the government would default if Congress did not increase the US$31.4 trillion debt ceiling by Jun 5, having previously said a default could happen as early as Jun 1.
Talk that the US rate-hiking cycle may not be over as soon as hoped, given signs of economic strength, have bolstered the US dollar this month and could support the currency even as US debt-ceiling worries abate.
Data released on Friday showed that US consumer spending increased more than expected in April and inflation picked up, adding to signs of a still-resilient economy.
Money markets price in a roughly 62 per cent chance that the Fed will raise rates by 25 basis points in June, versus a roughly 26 per cent chance a week ago.
Elsewhere, the Turkish lira touched a fresh record low at 20.08 per US dollar, after President Tayyip Erdogan secured a victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.
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