The dollar retreated from a two-week top against its major peers on Thursday as investors trimmed bets that the Federal Reserve will raise interest rates this month, though the looming debt ceiling deadline gave safe haven support to the greenback.
A divided U.S. House of Representatives passed a bill to suspend the $31.4 trillion debt ceiling on Wednesday, with the focus now on how it will fare in the Democratic-led Senate just days before the federal government is expected to run out of money to pay its bills.
The dollar was mixed in Asia trade and barely reacted to the vote, with the euro rising 0.04% against the greenback to $1.06895.
Sterling slipped 0.01% to $1.2440.
The U.S. dollar index rose 0.06% to 104.21, though was still down from an over two-month high hit in the previous session, as traders pared back their expectations of another rate hike by the Federal Reserve this month.
Fed officials including the vice chair-designate pointed towards a rate hike “skip” in June, giving time for the U.S. central bank to assess the impact of its tightening cycle thus far against still strong inflation data.
Markets are now pricing in a roughly 26% chance that the Fed will raise rates by 25 basis points at its upcoming meeting, as compared to a near 67% chance a day ago, according to the CME FedWatch tool.
“The recent run of U.S. economic data does favor another rate hike in the near-term, although our baseline is that the FOMC is already done with its current tightening cycle,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
Elsewhere, the Japanese yen rose nearly 0.1% to 139.24 per dollar.
Japan’s financial authorities met earlier this week in the wake of the yen’s slide to a six-month low against the U.S. dollar, where the country’s top diplomat said that Japan will closely watch currency moves and won’t rule out any options.
China’s bumpy recovery
In Asia, the Chinese offshore yuan rose over 0.1% to 7.1077, reversing some of its losses from the previous session, when it slumped to a six-month low.
China’s factory activity unexpectedly swung to growth in May from a decline in April, a private sector survey showed on Thursday, driven by improved production and demand, helping struggling firms that have been hit by slumping profits.
The yuan had fallen nearly 3% against the dollar in both the onshore and offshore markets in May, as China’s post-Covid economic recovery struggles to gain steam.
On Wednesday, the official manufacturing purchasing managers’ index data showed that China’s factory activity shrank faster than expected in May, falling to a five-month low of 48.8.
“On net, the path of least resistance for USD/CNH is to the upside considering the negative RMB carry, push-back in China’s reopening momentum and foreign outflows,” said OCBC currency strategist Christopher Wong.
The weak economic data out of China also dragged the Australian and New Zealand dollars to their lowest in more than six months in the previous session, with both currencies struggling to recoup their losses on Thursday.
The Aussie rose 0.02% to $0.6505, while the kiwi fell 0.07% to $0.6017. The antipodean currencies are often used as liquid proxies for the yuan.
“Until a broader stimulus program is unveiled, the yuan won’t find a bid, especially with the (People’s Bank of China) set to loosen monetary policy first,” said strategists at Macquarie.
“Inevitably, further weakening in the yuan could put new upward pressure on the USD vs the majors too, extending the strength in the USD seen since early May for a bit more.”
