U.S. dollar gains as market expects further rate hikes

The U.S. dollar continued its rally in the Asian market on Monday local time as investors expect further interest rate hikes by the Federal Reserve.

The dollar index, which keeps a tab on the currency's value against six other major currencies, gained 0.02 percent to 104.29. The index also rallied throughout last week.

The euro posted a 0.13 decline versus the greenback to $1.0719, while sterling fell by 0.07 percent to $1.2342. Germany, Europe's largest economy, fell into a recession after posting declines in gross domestic product for two straight quarters.

In the forex market, the Australian dollar rose by 0.17 percent versus the greenback to $0.6529. Meanwhile, the New Zealand dollar strengthened by 0.08 percent to $0.6052. Analysts explained that the Aussie and Kiwi are sensitive to risk appetite in the market and that the debt ceiling deal in the U.S. has propped up their values.

The Turkish lira continued its descent, trading at 20.04 per dollar. The currency had posted a record low of 20.06 against the dollar on Friday. Analysts said President Tayyip Erdogan's victory in the country's presidential election put pressure on the lira's value in the market.

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Against the Japanese yen, the dollar posted a new six-month high of 140.91 early in the trading session. The U.S. currency is currently on track to post more than a three percent monthly gain against the yen.

According to analysts, the yen weakened as the U.S. Treasury yields rose. The two-year Treasury yield, which reflects the market's expectations of the Fed's future policy, gained 10 basis points to hit over a two-month high of 4.639 percent on Friday.

Signs of economic resilience in the U.S. prompted the dollar and the Treasury yields to rise in the market as investors expected the Fed to prolong its monetary tightening cycle. The Department of Labor reported last week that unemployment claims in mid-May rose at a lower-than-expected rate.

Investors are currently waiting for non-farm payroll data for May this Friday. The previous non-farm payroll data showed that job growth in the U.S. increased in line with estimates but remained at a high rate. Analysts said a strong job market might cause wage inflation, leading to soaring consumer prices.

"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 National Australia Bank head of FX strategy Ray Attrill.

Fed funds future now forecast a 68 percent probability that the Fed will increase the interest rate by 25 basis points in June, up from a 17 percent chance projected about a week ago.

Debt ceiling deal spurs risk sentiment

"We've got a risk-positive response so far to the debt deal news."

Ray Attrill, Head of FX Strategy at National Australia Bank

According to analysts, the recent debt ceiling agreement between the White House and Republicans will increase risk appetite among investors. Both sides have agreed to raise the 31.4 trillion debt limit until January 1, 2025. President Joe Biden said Sunday that the agreement was ready for a Congress vote.

Previously, analysts said the ongoing debate regarding the debt ceiling between top American lawmakers supported the U.S. dollar rally and created volatility in the equity market. In the event of uncertainty, such as the unresolved debt ceiling crisis, investors usually choose the dollar as a store of value.

Earlier this month, the Treasury Department warned that the U.S. could default on its payment obligations as soon as June 1. The Treasury, however, announced the sales of its bills due on the X-date to extend the time limit.

Analysts explained that the default would trigger a recession in the U.S. and market volatility in various parts of the globe.