Dollar elevated as sticky inflation cements Fed hike bets, debt ceiling deal lifts optimism

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SINGAPORE — The dollar was firm on Monday as economic resilience in the United States raised market expectations for further rate hikes by the Federal Reserve, while news that a debt ceiling deal had been finalized sparked some risk-on sentiment.

The greenback notched a fresh six-month high of 140.91 yen in early Asia trade and was headed for a monthly gain of more than 3% against the Japanese currency.

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The yen’s renewed decline has come on the back of rising US Treasury yields, as bets grow that interest rates in the United States would stay higher for longer.

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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.

Yields on US Treasury jumped on the back of the data, with the two-year yield, which typically reflects near-term interest rate expectations, rising more than 10 basis points to an over two-month high of 4.639% on Friday.

Cash US Treasurys were untraded in Asia on Monday, owing to the Memorial Day holiday in the United States, while futures were broadly steady. Ten-year futures’ implied yield was 3.84%.

The UK market is similarly closed on Monday for a holiday.

Against the dollar, the euro fell 0.13% to $1.0719, while sterling slipped 0.07% to $1.2342.

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“Whether the dollar sustains the rally that we’re seeing, I think it’ll depend on particularly the wages data, or average earnings within Friday’s payrolls report, and obviously we’ve got CPI before the Fed as well,” said Ray Attrill , head of FX strategy at National Australia Bank (NAB).

“There’s still quite a lot of data to flow under the bridge before we get to the June meeting.”

Money markets are now pricing in a nearly 68% chance that the Fed will raise rates by 25 bps in June, as compared to a roughly 17% chance a week ago, according to the CME FedWatch tool.

DEBT DEAL DONE?

Risk sentiment in Asia was buoyed by news over the weekend that US President Joe Biden had finalized a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025.

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Biden said on Sunday that the deal was ready to move to Congress for a vote.

The risk-sensitive Australian and New Zealand dollars edged slightly higher, with the Aussie rising 0.17% to $0.6529.

The kiwi gained 0.08% to $0.6052.

“We’ve got a risk-positive response so far to the debt deal news,” said NAB’s Attrill.

“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.”

US Treasury Secretary Janet Yellen had on Friday said the government would default if Congress did not increase the $31.4 trillion debt ceiling by June 5, having previously said a default could happen as early as June 1.

Against a basket of currencies, the US dollar rose 0.02% to 104.29.

Elsewhere, the Turkish lira was kept under pressure at 20.04 per US dollar, after having slumped to a record low of 20.06 per dollar on Friday.

President Tayyip Erdogan secured victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.

(Reporting by Rae Wee; Editing by Stephen Coates)