The U.S. dollar exhibited a slight retreat against major currencies on Tuesday in Singapore. However, it remained close to a two-month pinnacle as the recent resolution regarding the U.S. debt ceiling injected some optimism into the market. Nonetheless, this agreement may encounter obstacles during its journey through Congress, thereby potentially introducing uncertainty to the situation.
The dollar index, a gauge measuring the U.S. currency against six significant counterparts, experienced a marginal decline of 0.02%, resting at 104.28. Remarkably, this level is not far from the two-month high of 104.42 reached on Friday. As the month draws to a close, the index is poised to conclude with a 2.5% gain.
Several hard-line Republican lawmakers made their stance clear on Monday by expressing opposition to a deal aimed at raising the United States’ daunting $31.4 trillion debt ceiling. Their dissent highlights the hurdles that lie ahead for Democratic President Joe Biden and top congressional Republican Kevin McCarthy, who must navigate the Republican-controlled House of Representatives and the Democratic-controlled Senate to secure approval for the package before the impending limit is reached, anticipated to be next Monday.
In the words of Marc Chandler, the chief market strategist at Bannockburn Global Forex in New York, it appears as if the two political parties in the United States are engaged in a high-stakes game of chicken, each daring the other side to concede. However, there exists a middle ground, consisting of a higher debt ceiling and some reduction in spending within the FY24 budget.
Contained within the 99-page bill is a provision to suspend the debt limit until January 1, 2025, allowing lawmakers to temporarily set aside this politically sensitive issue until after the presidential election in November 2024. Additionally, the bill would impose a cap on certain government expenditures over the next two years.
U.S. Treasury Secretary Janet Yellen warned on Friday that failure to increase the debt ceiling by June 5 would result in a government default. Previously, she had indicated that a default could occur as early as June 1.
Currency strategist Carol Kong from Commonwealth Bank of Australia (OTC:CMWAY) stated that uncertainty surrounding a potential U.S. government default is likely to persist until Congress passes the agreement into law. Besides the volatility triggered by the debt ceiling concerns, expectations of Federal Reserve interest rate hikes are anticipated to maintain the dollar’s strength in the near future.
According to the CME FedWatch tool, markets are presently pricing in a 60% likelihood of a 25-basis-point rate increase in June, a significant surge compared to the 26% probability recorded just a week prior.
Looking ahead, currency strategist Christopher Wong from OCBC identified labor data, including an upcoming payrolls report due on Friday, as the focal point of the week, aside from the impending debt ceiling vote. Market participants are to some extent assuming that the debt agreement will gain approval from Congress.
Meanwhile, longer-term U.S. Treasuries experienced a rally in Asia following the announcement of the debt ceiling deal, resulting in a decline in benchmark 10-year yields by 6 basis points to 3.760%. Similarly, 30-year yields dropped 6.4 basis points, settling at 3.913%. Bond prices rose as yields fell.
In currency pairings, the euro demonstrated a slight upward movement of 0.01% against the dollar, reaching $1.0706, while sterling concluded the day at $1.2356, exhibiting a modest increase of 0.04%.
The yen, on the other hand, strengthened by 0.11% to 140.31 per dollar after hitting a six-month low of 140.91 per dollar on Monday.
