Dollar set for third week of gains as US debt talks loom large

By Iain Withers

LONDON (Reuters) – The dollar eased on Friday but stayed on track for a third straight weekly gain, as markets raised bets on higher-for-longer interest rates to curb sticky inflation and nervously awaited resolution of last-ditch talks on the U.S. debt ceiling.

Apparent progress on Thursday in the talks between President Joe Biden and top congressional Republican Kevin McCarthy helped ease jitters, but markets stayed on edge over any risk of a default ahead of a long bank holiday weekend in the U.S.

Monday is a bank holiday in the U.S. so market participants will have to wait until Tuesday 30th May to trade positions again so there is a strong belief that Washington needs to make a deal happen today,” currency analysts at MUFG said in a note.

Wall Street traders have become increasingly wary of U.S. government debt securities, but the prospect of an imminent deal helped lift sentiment across markets on Friday and boost more risk-sensitive currencies at the expense of the dollar.

The U.S. dollar index, which tracks the currency against six major counterparts, was last down 0.2% on the day at 104.04, just off Thursday’s two-month high of 104.31. It was on track for a weekly gain of around 0.8%.

The dollar’s recent momentum has also been driven by raised expectations that the Federal Reserve will have to keep interest rates higher for longer to subdue inflation.

Money markets are pricing in a 37.8% chance that the Fed will deliver another 25-basis-point rate hike at its policy meeting next month, while expectations that it will begin cutting rates later this year have been scaled back.

Data released on Thursday showed the number of Americans filing new claims for unemployment benefits increased moderately last week to 229,000, lower than expectations.

Recent moves in currencies have been mainly driven by a sharp repricing of FOMC policy,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

The dollar edged away from a six-month high against the yen and last stood at 139.675, off the previous session’s 140.23, which was its highest since November.

The euro and British pound regained some ground, but were struggling to recoup recent losses against the dollar.

Leading European policymakers struck varying tones on the future path of euro zone inflation on Friday, with European Central Bank chief economist Philip Lane pushing back against concerns about core inflation.

The single currency was last up 0.1% against the dollar at $1.07350, but was not far from its two-month low of $1.0708 hit in the previous session.

Sterling gained 0.4% to $1.23670, after data showed British consumers picked up spending in April, although the currency was still heading for a weekly loss.

(Additional reporting by Rae Wee in Singapore; Editing by Kim Coghill and Clarence Fernandez)