US Dollar Holds Steady in Forex Market Amid Fed Rate Hike Expectations and Debt Ceiling Optimism

Dollar Strengthens on Anticipation of Fed Rate Hikes, Debt Ceiling Deal Progress

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In forex trading on Monday, the U.S. dollar held its ground as investors anticipated further rate hikes by the Federal Reserve. However, the news of a finalized debt ceiling deal led to a reduction in safe-haven demand for the greenback.

During early Asia trade, the dollar reached a six-month high of 140.91 yen before paring some gains and settling at 140.39 yen. It was set to close the month with a solid 3% gain against the Japanese currency.

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The yen's recent decline can be attributed to the increasing U.S. Treasury yields, signaling expectations of prolonged higher interest rates in the United States.

Last week's release of data showed higher-than-expected U.S. consumer spending in April, accompanied by an uptick in inflation, which indicates a resilient economy.

As a result of the data, U.S. Treasury yields surged, with the two-year yield hitting a more than two-month high of 4.639% on Friday.

On Monday, cash U.S. Treasuries remained untraded in Asia due to the Memorial Day holiday in the United States, while futures markets were relatively stable. The implied yield for ten-year futures was at 3.84%.

Both the U.S. and UK markets were closed on Monday for their respective holidays.

In forex trading, the euro saw a marginal 0.02% increase to $1.0735 against the dollar, while the pound slipped slightly by 0.01% to $1.23495.

Ray Attrill, Head of FX Strategy at National Australia Bank (NAB), noted that the sustainability of the dollar's rally depends on upcoming data, such as wages and average earnings in the Friday payrolls report, as well as the Consumer Price Index (CPI) ahead of the Federal Reserve meeting.

Market sentiment suggests a 62% chance of a 25-basis-point rate hike by the Fed in June, up from approximately 26% a week ago, according to the CME FedWatch tool.

Turning to positive news, U.S. President Joe Biden and House Speaker Kevin McCarthy reached a budget agreement to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025. This development instilled optimism, leading to a rebound in riskier currencies like the Australian and New Zealand dollars, which had hit six-month lows last week.

The Australian dollar rose 0.41% to $0.6545, while the New Zealand dollar gained 0.29% to $0.60645.

The U.S. dollar index slipped by 0.15% to 104.11, although it remained near last week's two-month peak of 104.42.

NAB's Attrill commented on the positive response to the debt deal news, but emphasized the need for the deal to be successfully concluded. However, market participants are optimistic that it will be finalized before the new X-date.

U.S. Treasury Secretary Janet Yellen had previously warned of a potential government default if Congress did not raise the debt ceiling by June 5, possibly as early as June 1.

In other news, the Turkish lira continued to face pressure, reaching 20.04 per U.S. dollar after hitting a record low of 20.06 per dollar on Friday. Concerns about President Tayyip Erdogan's extended rule into a third decade following his victory in the country's presidential election have raised worries about increasing authoritarianism.

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