THE US dollar hit a seven-week peak on Thursday (May 18) after US President Joe Biden and top congressional Republican Kevin McCarthy worked towards avoiding a damaging debt default, while investors scaled back Federal Reserve (Fed) easing expectations.

Biden and McCarthy on Wednesday underscored their determination to strike a deal soon to raise the government’s US$31.4 trillion debt ceiling, having agreed a day earlier to negotiate directly after a months-long stand-off.

“In the short-term, the debt ceiling is win-win for the US dollar,” said Viraj Patel, global macro strategist at Vanda Research.

“If it gets worse, you’re going to see a global hard landing and you will want to be owning US dollars. If it gets resolved, people shift their expectations for the Fed and we could see another hike,” he added.

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

The rate traders have priced for the Fed’s December meeting stands at 4.525 per cent, implying around 55 basis points of easing by year-end, down around 5 basis points from the day before.

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The US dollar index firmed 0.3 per cent to 103.17, its highest level since Mar 27. It was last at 103.10.

The euro slipped as much as 0.3 per cent to US$1.0805, its lowest level in six weeks, while sterling was just above Wednesday’s three-week low of US$1.2422.

The US dollar also rose to a five-month high of 137.935 yen, having risen for six straight trading sessions, its longest such streak since October.

“US dollar/yen continues to be the market’s favourite pair of risk sentiment, so on the back of some positive developments on the debt ceiling negotiations, we saw US dollar/yen unwind some of the losses recently,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Action in Asia was partly led by the Aussie dollar, after data on Thursday showed that Australia’s employment unexpectedly dipped in April following two months of outsized gains. The jobless rate also ticked up in a sign the red-hot labour market might be cooling.

The Aussie slipped about 0.4 per cent after the data release and was last 0.3 per cent lower at US$0.6640, with expectations for further tightening from the Reserve Bank of Australia (RBA) dampened.

“Today’s employment figures in Australia may complicate any plans to hike again,” said Francesco Pesole, FX strategist at ING.

“Still, we must remember there is close to nothing priced in terms of RBA tightening, so the room for a dovish re-pricing to hit AUD is limited.”

The kiwi slipped 0.1 per cent to US$0.6240 after New Zealand announced a worse-than-forecast budget deficit as a slowing economy and a lower tax take hit its coffers, leaving the Labour government walking a tightrope as its spending plan is expected to fan inflationary pressures.

The Chinese yuan slumped to its lowest level against the US dollar since December, having weakened past the key 7-per-US-dollar level on Wednesday for the first time in five months, amid geopolitical tensions and more signs of China’s post-Covid recovery losing steam. REUTERS