US dollar rises to seven-week high buoyed by data, debt ceiling optimism

The dollar rose to fresh seven-week peaks on Thursday as another round of solid economic data further pared back bets on easing by the Federal Reserve and amid market optimism about a U.S. debt ceiling deal to avert a potential default.

Top U.S. congressional Republican Kevin McCarthy said on Thursday that Speaker McCarthy sees a bill to raise the government’s $31.4 trillion debt ceiling on the House floor next week, according to news reports. He noted that negotiations are at a better place than last week and there is a “structure” to the talks, he added.

“It’s pretty clear that some people were shorting the dollar as a hedge in anticipation of a crisis, but now with all the signals that we will find a resolution in the next few days, people are unwinding these positions so the dollar is strengthening,” said Thierry Wizman, global FX and rates strategist, at Macquarie in New York.

Apart from debt ceiling negotiations, investors also looked at economic data, which in recent weeks have depicted strength.

Thursday’s reports showed lower-than-expected U.S. initial jobless claims of 242,000 in the latest week, compared with forecasts of 254,000.

Another piece of data indicated a milder-than-expected fall in the Philadelphia Federal Reserve’s manufacturing index to -10.4 in May from -31.3 in April. Markets were forecasting a contraction of -19.8. The index though has been in contraction since September and many of the real sector components remain in negative territory.

The dollar index touched a new seven-week high of 103.59, and was last up 0.6% at 103.49 .

Against the yen, the dollar rose to a six-month peak of 138.67 and was last up 0.6% at 138.515 yen .

Traders are pricing in a roughly 33% chance that the Fed raises the benchmark interest rate at its June meeting. Around a month ago, markets were pricing in around a 20% chance of a cut.

U.S. rate futures have also factored in a fed funds rate of 4.635% at the Fed’s December meeting, implying a roughly 40 basis points of easing by year-end, down about 15 basis points from the day before.

“The Fed was always going to hold the line with regard to the prospect of rate cuts,” said Macquarie’s Wizman. “It’s not too much of a surprise that there won’t be rate cuts this year. This was always their view.”

Fed officials on Thursday leaned against rate cuts this year, citing persistently high inflation.

Dallas Fed President Lorie Logan on Thursday said she’s concerned that “much too high” inflation is not cooling fast enough yet to allow the Fed to pause its interest-rate hike campaign in June.

Fed Governor and vice chair nominee Philip Jefferson said something similar. He noted that progress on inflation may be slowing but said it was also too early in the policy tightening process to judge the full impact of the rapid rate increases approved by the central bank so far.

Currency bid prices at 11:51AM (1551 GMT)
Source: Reuters (Reporting by Rae Wee Editing by Shri Navaratnam)