The dollar retreated on Monday, coming back from a six-month high against the yen, as the agreement on the US debt ceiling boosted risk appetite in financial markets and reduced the attractiveness of the greenback for safe havens.
US President Joe Biden on Sunday finalized a budget deal with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until January 1, 2025, and said the deal was ready to be voted on by Congress.
After briefly hitting a six-month high of 140.91 yen during Asian trading, the dollar retreated and lost around 0.1% to 140.50 yen.
The Dollar Index, which measures the value of the US unit against a basket of other major currencies, was also a bit weaker around 104.23 but not far off last week’s two-month highs.
The decline in the safe-haven dollar came as global equities rallied on positive news from Washington, although trade was generally subdued, parts of Europe including the Great Britain, being on holiday. Monday was also a holiday in the United States.
“An initial reaction to rising risk is likely as the cloud of US default has dissipated,” said Charu Chanana, market strategist at Saxo Markets in Singapore.
“But attention will quickly turn to the fact that getting the deal is just one step in the process and that a House of Representatives and Senate deal by June 5 is still very much. hard to get.
The deal would suspend the debt limit until Jan. 1, 2025, cap spending in the 2024 and 2025 budgets, recover unused COVID funds, speed up the permitting process for some energy projects, and include additional requirements for work for food assistance programs for poor Americans.
RATE SUPPORT
Improving global sentiment pushed the risk-sensitive Australian and New Zealand dollars higher from last week’s six-month lows.
The Australian dollar rose 0.25% to $0.6535, while the Kiwi rose 0.26% to $0.6063.
“We have a positive risk reaction so far to the news of the debt deal,” said Ray Attrill, head of currency strategy at National Australia Bank.
“Obviously there is still a need to get this debt deal through, but I think the markets are happy to ride on the presumption that it will be done before the new X date.”
US Treasury Secretary Janet Yellen said on Friday the government would be in default if Congress did not raise the debt ceiling by $31.4 trillion by June 5, after she had previously stated that a default could occur as early as June 1.
The dollar nevertheless held up against other major currencies, with the euro losing 0.1% to $1.0722, while the pound sterling weakened slightly to $1.2344.
The idea that the US rate hike cycle may not end as quickly as hoped, given the signs of strength in the economy, has supported the dollar this month.
The dollar was on track for a monthly gain of around 3% against the Japanese currency.
Data released on Friday showed U.S. consumer spending rose more than expected in April and inflation picked up, reinforcing signs of a still resilient economy.
Money markets estimate a 62% chance of the Fed raising rates by 25 basis points in June, up from about 26% a week ago.
Elsewhere, the Turkish lira hit a new high of 20.065 to the dollar after President Tayyip Erdogan clinched victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.
