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Dollar Slides as Federal Reserve Holds Steady; US Debt Agreement Clears House

In the realm of currency markets, the dollar relinquished its grasp on a two-month pinnacle on Thursday as speculators tempered expectations of an imminent interest rate hike by the Federal Reserve. However, the greenback found some solace with the U.S. House of Representatives granting approval to temporarily suspend the $31.4 trillion debt ceiling.

With the bill to suspend the debt ceiling passed, attention now shifts to the Democratic-led Senate, as the federal government’s imminent financial predicament looms just days away.

Initially, the dollar demonstrated little reaction to the news, but gradually recovered ground throughout the Asian trading day, reversing some of its earlier session losses.

Meanwhile, the euro experienced a marginal decline of 0.07% against the dollar, resting at $1.0681, while sterling slipped slightly by 0.01% to $1.24395.

According to Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY), our perspective is that the U.S. government will steer clear of a potentially catastrophic default that could not only disrupt the American economy but also have a global impact. Kong further asserts that the dollar may garner additional support following a successful vote today.

The U.S. dollar index displayed a 0.13% rise, reaching 104.28. However, it retreated from the previous session’s over two-month high as traders adjusted their expectations of an imminent rate hike by the Federal Reserve this month.

Officials from the Federal Reserve, including the vice chair-designate, have indicated a probable rate hike deferral in June. This decision allows the central bank to evaluate the consequences of its ongoing tightening cycle in light of persistent inflationary pressures.

Market projections now estimate a roughly 38% likelihood of a 25-basis-point rate increase at the upcoming Federal Reserve meeting, compared to a nearly 67% probability registered a day ago, as reported by the CME FedWatch tool.

Although recent U.S. economic data generally favors a near-term rate hike, Kong states that our fundamental belief is that the Federal Open Market Committee (FOMC) has already concluded its current tightening cycle.

In other regions, the Japanese yen experienced a decrease of approximately 0.2% to 139.59 per dollar. Earlier this week, Japanese financial authorities convened in response to the yen’s decline to a six-month low against the dollar. Japan’s top diplomat declared that the nation would closely monitor currency movements and keep all options open.

Regarding China, the offshore yuan displayed a valuation of 7.1184 per dollar, distancing itself from the six-month low observed in the previous session. This recovery was bolstered by a private business survey released on Thursday, which surprisingly revealed that China’s manufacturing sector had rebounded in May after a decline in April.

Throughout May, the yuan had depreciated by nearly 3% against the dollar in both onshore and offshore markets, as China’s post-COVID economic recovery struggled to gather momentum. The official manufacturing purchasing managers’ index (PMI) data for May presented an even more disheartening picture, indicating a more rapid contraction in China’s factory activity than anticipated, with a five-month low of 48.8.

Christopher Wong, a currency strategist at OCBC, stated, “Considering the negative RMB carry, setbacks in China’s reopening progress, and capital outflows, the USD/CNH’s trajectory appears to favor an upward movement.”

Elsewhere, the Australian dollar experienced a minor boost following the release of Thursday’s Chinese factory report, closing 0.11% higher at $0.6511.

Conversely, the New Zealand dollar witnessed a decline of 0.18% to $0.6010.


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