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Dollar weakens after gains all week; debt deal hopes boost market sentiment

by Jessica Weisman-Pitts
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2023 05 19T113313Z 1 LYNXMPEJ4I0FU RTROPTP 4 USA MARKETS LIBOR SOFR

Dollar weakens after gains all week; debt deal hopes boost market sentiment

By Amanda Cooper and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) – The dollar fell on Friday after posting gains for most of the week, as optimism over a breakthrough in U.S. debt ceiling talks boosted risk sentiment and spurred buying of currencies that benefit from positive economic and market conditions.

The euro, sterling, and commodity currencies such as the Australian, New Zealand and Canadian dollars all rallied at the expense of the greenback.

The dollar index eased 0.2% to 103.31, after hitting seven-week peaks the previous session. On the week, the dollar posted a 0.6% gain.

Negotiators for Joe Biden’s Democrats told the president on Friday that they are making “steady progress” in talks with Republicans aimed at avoiding a U.S. default, just days after Biden and top U.S. congressional Republican Kevin McCarthy underscored their determination to strike a deal to raise the government’s $31.4 trillion debt ceiling.

That eased fears of an unprecedented and economically catastrophic default.

“There is a little bit of excitement over the debt ceiling, which is helping risk appetite,” said Brad Bechtel, global head of FX at Jefferies in New York. “It’s also a Friday and people cover ahead of the weekend. The dollar has had a nice rally all week.”

At the same time, data pointing to a still-tight labour market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also raised expectations that the Federal Reserve could raise rates again next month to tame inflation.

The market has priced in a roughly 36% chance that the Fed raises the benchmark rate at its June meeting by 25 basis points, with the majority of traders still factoring in a pause.

Money markets also showed traders believe U.S. rates will fall to around 4.7% by year-end, compared with an expectation for a drop to 4.25% just two weeks ago – reflecting how the chances of a flurry of rate cuts have dropped.

“The message from the Fed has been really hawkish. We know there has been this divergence between what the market’s expecting and what the Fed has actually been saying and that was always going to need to be reconciled at some point. We’re starting to see this play out in the FX market now,” City Index strategist Fiona Cincotta said.

Two Fed policymakers said on Thursday U.S. inflation does not look like it is cooling fast enough to allow the Fed to pause its tightening campaign.

Investors currently hold bearish bets, or short positions, against the dollar versus other G10 currencies worth nearly $12 billion – the largest in almost two years. This would suggest there could be some incentive to unwind some of those bets, meaning the dollar has room to rally.

In mid-morning trading, the dollar slipped 0.1% against the yen to 138.55 yen, having risen to a six-month peak of 138.745 earlier. On the week, the dollar gained 2.1%, on track for its largest weekly rise since mid-February.

The euro rose 0.2% to $1.0791, just above its lowest for seven weeks, while sterling inched up 0.2% to $1.2434, not far off its lowest in a month.

Among other major currencies, the Australian dollar took some heart from a pickup in commodity prices like copper and iron ore, rising 0.5% to $0.6653.

In China, the yuan slid to its lowest since December to 7.0752 per U.S. dollar in the offshore market, as data offered evidence of a sputtering recovery in the world’s second-largest economy. The dollar, however, was last down 0.2% at 7.0259.

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Currency bid prices at 10:00AM (1400 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.3300 103.5000 -0.15% -0.155% +103.6200 +103.0700

Euro/Dollar $1.0793 $1.0771 +0.20% +0.73% +$1.0825 +$1.0760

Dollar/Yen 138.5600 138.7150 -0.11% +5.69% +138.7000 +137.9750

Euro/Yen 149.54 149.37 +0.11% +6.59% +149.7900 +148.7600

Dollar/Swiss 0.9018 0.9052 -0.38% -2.48% +0.9058 +0.9005

Sterling/Dollar $1.2433 $1.2409 +0.21% +2.82% +$1.2468 +$1.2393

Dollar/Canadian 1.3496 1.3502 -0.04% -0.39% +1.3512 +1.3469

Aussie/Dollar $0.6657 $0.6622 +0.55% -2.33% +$0.6671 +$0.6618

Euro/Swiss 0.9731 0.9747 -0.16% -1.66% +0.9751 +0.9729

Euro/Sterling 0.8678 0.8678 +0.00% -1.88% +0.8696 +0.8677

NZ $0.6276 $0.6225 +0.85% -1.13% +$0.6290 +$0.6224

Dollar/Dollar

Dollar/Norway 10.8660 10.9200 -0.40% +10.82% +10.9380 +10.8190

Euro/Norway 11.7202 11.7474 -0.23% +11.74% +11.7781 +11.6800

Dollar/Sweden 10.5480 10.5512 +0.04% +1.35% +10.5822 +10.5059

Euro/Sweden 11.3808 11.3768 +0.04% +2.07% +11.3932 +11.3487

 

(Reporting by Amanda Cooper in London and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Rae Wee in Singapore; Editing by Kim Coghill, Kirsten Donovan)