29-5-2023 (SINGAPORE) The dollar remained firm on Monday as the United States’ economic strength raised market expectations for further rate hikes by the Federal Reserve. Additionally, news of a finalized debt ceiling deal contributed to a risk-on sentiment.
In early Asia trade, the greenback reached a fresh six-month high against the yen at 140.91, heading for a monthly gain of over 3% against the Japanese currency.
The yen’s recent decline is attributed to the rising US Treasury yields, as the belief grows that interest rates in the United States will remain elevated for a longer period.
Recent data released on Friday revealed that consumer spending in the US exceeded expectations in April, and inflation showed signs of picking up, indicating a resilient economy.
In response to the data, US Treasury yields surged, with the two-year yield, which typically reflects short-term interest rate expectations, climbing over 10 basis points to a two-month high of 4.639% on Friday.
Due to the Memorial Day holiday in the United States, cash US Treasuries were not traded in Asia on Monday, while futures remained relatively steady. The implied yield for ten-year futures stood at 3.84%.
Similarly, the UK market was closed on Monday for a holiday.
Against the dollar, the euro declined by 0.13% to $1.0719, while sterling slipped 0.07% to $1.2342.
Ray Attrill, head of FX strategy at National Australia Bank (NAB), commented, “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. There’s still quite a lot of data to flow under the bridge before we get to the June meeting.”
According to the CME FedWatch tool, money markets now indicate a nearly 68% chance of a 25 basis points rate hike by the Fed in June, compared to a roughly 17% chance a week ago.
Debt Deal Finalized?
News over the weekend regarding a budget agreement between US President Joe Biden and House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until January 1, 2025, buoyed risk sentiment in Asia.
Biden announced on Sunday that the deal was ready to be presented for a vote in Congress.
As a result, the risk-sensitive Australian and New Zealand dollars edged slightly higher, with the Aussie rising 0.17% to $0.6529, while the kiwi gained 0.08% to $0.6052.
NAB’s Attrill remarked, “We’ve got a risk-positive response so far to the debt deal news. 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 previously warned that the government would default if Congress did not raise the $31.4 trillion debt ceiling by June 5, suggesting that a default could occur as early as June 1.
Against a basket of currencies, the US dollar rose 0.02% to 104.29.
In other news, the Turkish lira remained under pressure at 20.04 per US dollar after reaching a record low of 20.06 per dollar on Friday.
President Tayyip Erdogan secured victory in Turkey’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.
