Dollar edges higher; Fed rate hike in June still possible

Investing.com - The U.S. dollar gained in early European trade Tuesday, with risk sentiment on the slide as the debt ceiling impasse continued and following hawkish comments from Fed officials.

At 02:55 ET (06:55 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, edged higher to 103.140, not far removed from last week’s 103.63 two-month high.

U.S. President Joe Biden and House Speaker Kevin McCarthy ended discussions late Monday with no agreement on how to raise the U.S. government's $31.4 trillion debt ceiling.

U.S. Treasury Secretary Janet Yellen added to the urgency of the situation by stating that it’s now “highly likely” that her department will run out of sufficient cash in early June.

There are less than two weeks before a possible first-ever U.S. government default that would roil the financial markets, and the dollar, which often acts as a safe haven during times of stress, has seen some demand.

Also boosting the greenback were comments by central bank officials that indicated a rate hike in June remains a live option.

Federal Reserve Bank of St. Louis President James Bullard, a known hawk, backed two more interest-rate increases this year in order to tame inflation, while his Minneapolis colleague Neel Kashkari said the central bank should signal next month that tightening is not over even if it pauses next month.

Fed Chair Jerome Powell hinted at a pause at the central bank’s June meeting during a conference on Friday, but he may still have to convince a number of his colleagues.

USD/JPY fell 0.1% to 138.52, after earlier climbing to a near six-month peak in Asia trade, reflecting the stark contrast between a still-hawkish Fed and an ultra-dovish Bank of Japan.

However, the yen benefited from data that showed that the country’s manufacturing sector unexpectedly grew in May, while growth in services hit a record high.

EUR/USD traded largely flat at 1.0813 ahead of the release of the preliminary May PMI data for the euro zone, which is expected to show a strong services sector supporting lackluster manufacturing.

The European Central Bank still needs to raise its interest rates further to bring inflation down to its medium-term goal of 2%, ECB policymaker Pablo Hernández de Cos said on Monday.

GBP/USD fell 0.1% to 1.2426, with flash PMI figures also expected in the U.K., while the risk-sensitive AUD/USD traded largely flat at 0.6653 even as positive purchasing managers index data pointed to some resilience in the economy.

USD/CNY rose 0.2% to 7.0463, with the yuan trading near a six-month low to the dollar amid continued uncertainty over a slowing economic rebound in the country.

USD/HUF rose 0.2% to 346.43 ahead of a policy-setting meeting by Hungary’s central bank, which could result in a cut to its key interest rate for the first time in three years.

The central bank, which oversees the European Union’s highest borrowing costs, is expected to cut its overnight interest rate by a full percentage point to 17% later Tuesday.