Dollar higher; hawkish Fed officials, debt ceiling uncertainty helps

Investing.com - The U.S. dollar traded higher in early European hours Wednesday following hawkish comments from a number of Fed officials and with the debt ceiling standoff in Washington continuing.

At 03:10 ET (07:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, gained 0.2% to 102.560.

The greenback has benefited of late from the uncertainty surrounding the potential for a U.S. default if a deal to lift the country’s borrowing limit is not done.

President Joe Biden met with Republican House of Representatives Speaker Kevin McCarthy on Tuesday, and although encouraging noises about the likelihood of a deal emerged from the get-together, nothing was decided.

The lack of a deal would likely push the U.S. economy into recession, Biden warned, but it would also have an extremely negative impact globally and thus the dollar is gaining given its safe haven status.

“The potentially very negative spill-over into risk sentiment and money markets means that the upside risks for the dollar and the yen are quite significant in such a scenario,” said analysts at ING, in a note.

Also boosting the dollar Wednesday were hawkish comments by Fed policymakers this week, implying that the U.S. central bank could still lift interest rates once more.

The Federal Reserve raised interest rates last week for a 10th straight time, but hinted that it may be about to pause its aggressive policy tightening as it studies incoming economic data.

“At this point, based on the data I have so far, given how stubborn inflation has been, I can’t say that I’m at a level of the fed funds rate where it’s equally probable that the next move could be an increase or a decrease,” Cleveland Fed President Loretta Mester said on Tuesday.

EUR/USD fell 0.1% to 1.0856, ahead of the release of the final April CPI data for the eurozone, which is expected to show prices remain elevated.

“EUR/USD should remain primarily driven by the USD leg and the US debt-limit saga: we see 1.0800 as the key benchmark support, and a break below that level would probably signal a significant deterioration in market sentiment,” ING added.

GBP/USD fell 0.3% to 1.2454, with sterling remaining under pressure after the U.K. unemployment rate unexpectedly in March, raising the likelihood of the Bank of England pausing its run of interest rate increases when it next meets in June.

USD/JPY rose 0.3% to 136.79, after hitting a two-week peak overnight, AUD/USD fell 0.1% to 0.6649, while USD/CNY rose 0.2% to 6.9928, with the yuan falling to its weakest level since mid-December on growing bets that the People’s Bank of China will need to further ease monetary policy to support economic growth.