The U.S. dollar snapped its gaining streak in the Asian market on Tuesday local time as the debt ceiling agreement between top American lawmakers improved risk appetite among investors.
The dollar index, a measure of the greenback’s performance versus six major currencies, declined by 0.125 percent to 104.17 after touching a two-month high of 104.42 on Friday. It remains on track to end May with a 2.5 percent gain.
The euro gained 0.09 percent against the dollar to trade at $1.0715, while the pound strengthened by 0.11 percent to $1.2365. Both currencies previously traded lower in the forex market due to pressures from the rallying dollar. The news about a recession in Germany in the previous quarter also triggered euro sell-offs, analysts say.
Against the greenback, the yen added 0.28 percent to trade at 140.06 after the Japanese currency breached a six-month low of 140.91 a dollar on Monday. Commonwealth Bank of Australia currency strategist Carol Kong said the U.S. debt ceiling deal weighed on the yen, adding that a further sharp lift in the dollar-yen trading might prompt Japanese authorities to take action.
The Australian dollar increased by 0.14 percent to $0.655, while the New Zealand dollar traded at $0.606 after gaining 0.08 percent. The Turkish lira maintained its downward trend, hitting a record low of 20.16 a dollar after President Tayyip Erdogan won the country’s presidential election.
According to analysts, there is a rising activity in risk markets, like the equity market, because the U.S. debt ceiling agreement increases optimism in the nation’s ability to avoid a default. The Treasury Department previously warned that the country could fail to make its payment obligations as soon as the beginning of June.
Analysts say President Joe Biden and Rep. Kevin McCarthy will work to ensure the agreement passes the House of Representatives and Senate before the X-date, likely by next Monday. However, some Republican policymakers said Monday that they would oppose the deal to raise the country’s $31.4 trillion debt limit.
“It is as if the two political parties in the U.S. are playing a game of chicken and daring the other side to capitulate.”
Marc Chandler, Bannockburn Global Forex chief market strategist
Chandler said the deal, which involves a higher debt limit and budget cuts in the next fiscal year, is a “middle ground” between the White House and Republicans. The agreement will suspend the national debt ceiling until January 1, 2025, allowing lawmakers to set aside the issue until after the presidential election next year.
Fed’s policy in focus
In addition to volatility caused by the U.S. debt ceiling crisis, Kong said the expectations of the Federal Reserve’s rate hikes would likely support the dollar in forex trading in the near term. Fed fund futures predict a 60 percent chance of a 25-basis-point rate hike in June, up from a 26 percent probability a week earlier.
Earlier this month, the U.S. central bank hiked its fund rate by a quarter of a percentage point to the range of 5.00 to 5.25 percent. Fed Chairman Jerome Powell hinted at a possible rate hike pause in the upcoming policy meeting, saying that officials would continue to observe key economic data to determine whether further hikes would be “appropriate.”
Several voting members in the central bank, including Fed governor Christopher Waller, said inflation remained too high for the agency to consider a policy pivot in the near term. Waller said an interest rate hike pause is possible for the June meeting, but it will not mark the end of the Fed’s monetary tightening campaign.