Dollar pressured by dovish Powell, setbacks in debt ceiling negotiations

TOKYO ( – The dollar extended losses against the yen and euro in Asia on Monday afternoon, following a surprise failure in US debt ceiling negotiations and after Federal Reserve Chair Jerome Powell indicated a preference for slowing (dovish) interest rate hikes.

greenback slipped 0.15 percent to 137.725 yen to start the week, after snapping a six-day winning streak Friday, pulling back from a six-month peak.

The euro added 0.14 percent to $1.08205, extending Friday’s gain from a seven-week low.

Investors are now awaiting a landmark meeting between US President Joe Biden and Republican Speaker of the House Kevin McCarthy to discuss Monday’s debt ceiling.

Negotiations between the two sides abruptly stalled on Friday (19/5/2023) with Republican negotiators walking out of the meeting. Although talks eventually resumed, neither side has cited any progress, pushing the dollar lower.

Many currency analysts say the dangers are inching towards a real “X-date” in early June, when the Treasury is likely to run out of cash.

“Have we never seen this film before?” National Australia Bank strategist Rodrigo Catril said in a client note, while Westpac strategist Sean Callow called it a “hiccup.”

The outlines of the deal are in sight, Callow said.

Instead, the dollar is more likely to be boosted by the Fed’s outlook, and Powell’s preference for a break in June should be greater than the note hawkish from regional Fed presidents, leaving DXY in a selloff,” Callow added, referring to the US dollar index.

Powell told a central bank conference in Washington on Friday (19/5/2023) that tighter credit conditions mean “our policy rate may not need to rise as much as it should to achieve our goals,” though he reiterated that a decision will be made ” meeting after meeting.”

Money market traders have reduced bets for a hike on June 14 to just 12 percent.

The dollar index, which measures the US currency against six other major peers, was little changed at 103.07, drifting away from last week’s high of 103.63, a level last seen March 20.

Callow Westpac projects the index could dip towards 101 in the coming days or weeks, “mainly due to the ongoing ECB decision on inflation.”

European Central Bank President Christine Lagarde said on Friday (19/5/2023) officials needed to “brace” for “sustained high interest rates” to hit the inflation target.

Elsewhere, sterling rose 0.14 percent to $1.2464, continuing its recovery from last week’s three-week low.

The Aussie was flat at $0.6652. Its New Zealand counterpart rose 0.16 percent to $0.62855, with traders increasing bets to 1-in-3 for a half-point hike by New Zealand’s central bank Wednesday.

The Chinese yuan weakened to 7.0359 per dollar in offshore trade, creeping back to a six-month low on Friday (19/5/2023) at 7.0750.

The currency has been under pressure amid increasing signs the country’s post-COVID recovery may be easing, but got a break Friday (19/5/2023) after China’s central bank (PBOC) pledged to curb large exchange rate fluctuations.

“Despite these warnings, the PBOC may be bolstering the short-term underperforming yuan… to help provide some stimulus,” TD Securities strategist Mitul Kotecha wrote in a note.

“Overall, while the market may now be a little more cautious about pushing the yuan lower, we think the yuan will largely follow the dollar in the short term.”

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Translator: Apep Suhendar
Editor: Biqwanto Situmorang


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