Dollar trades near two-month high; Fed rate hike expectations rise

Investing.com - The U.S. dollar climbed higher in early European trading Tuesday, remaining close to a two-month peak, as traders digested the potential for more Federal Reserve interest rate hikes as well as the passage of the U.S. debt ceiling deal through a divided Congress.

At 03:05 ET (07:05 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 104.323, having reached a two-month high of 104.420 earlier in the session.

U.S. President Joe Biden and top congressional Republican Kevin McCarthy reached an agreement over the weekend to suspend the debt ceiling until 2025 and cap some federal spending in order to prevent a U.S. debt default.

This deal now has a limited amount of time to make its way through a narrowly divided Congress before the U.S. Treasury runs short of money to cover all its obligations, and is sure to face opposition from the extreme sides of both parties.

The dollar remained firm on Monday, when both the U.S. and U.K. markets were closed, and is on course to register a monthly gain of just under 2.5% as traders position for the potential that U.S. interest rates remain higher for longer.

The widely-watched monthly U.S. jobs report is scheduled for Friday, and is expected to show that the country’s labor market remains resilient, with 180,000 jobs expected to have been created in May.

On top of this, inflation remains elevated, and this has resulted in the market pricing in a 60% chance of a 25 basis-point hike from the Fed in June, underpinning the dollar.

Elsewhere, EUR/USD fell 0.3% to 1.0691, with the euro feeling the impact of the strengthening dollar, while Spanish inflation surprised to the downside, climbing 3.2% on the year in May, below the expected 4.4%.

GBP/USD edged higher to 1.2345, while USD/JPY traded 0.1% lower to 140.41, with the pair having earlier touched a six-month high as U.S. Treasury yields rose.

AUD/USD rose slightly to 0.6523, while USD/CNY rose 0.4% to 7.0918, hitting a new six-month high after the People’s Bank of China slashed its midpoint rate for the day, offering dovish signals to the market.

USD/TRY rose 1.4% to 20.2807, with the lira remaining very weak after Tayyip Erdoğan was re-elected president of Turkey, suggesting interest rates will remain low despite soaring inflation.