TOKYO (Reuters) – The U.S. dollar continued to come under pressure on Tuesday as the risk of U.S. debt default weighed on with little sign of a resolution to the dispute between Democrats and Republicans over a debt ceiling hike.
The Aussie dollar turned down after a modest early gain as economic data from its main trading partner China fell below analyst expectations, adding to the evidence that the recovery from the coronavirus pandemic is progressing well.
The U.S. dollar index, which measures currencies against a basket of six major currencies, fell 0.26% overnight, largely unchanged at 102.46 after retreating from a five-week high.
The dollar rose last week on both safe-haven demand on the back of weak Chinese data and a surprise rise in U.S. consumer inflation expectations, raising the risk of a June Fed rate hike. surfaced again.
But this week, a looming borrowing ceiling — which Treasury Secretary Janet Yellen has repeatedly said could be reached as early as June 1 — has been on the minds of investors.
President Joe Biden expressed confidence that a deal could be in time ahead of meetings with congressional leaders scheduled for later Tuesday. But Republican House Speaker Kevin McCarthy said there was still a long way to go between the two.
“The US dollar has been very turbulent over the past few days and has reacted sharply to the data,” said Sean Callow, senior FX strategist at Westpac.
“There’s no doubt there’s also debate about what increased stress over the debt ceiling means for the US dollar,” he added. “While the Japanese Yen and Swiss Franc appear likely to benefit, there are numerous historical examples of global market trauma caused by the US dollar actually rising.”
Westpac expects the dollar index to fall to around 101.05 in the short term.
The euro, the heaviest weight in the dollar index, was little changed at $1.0873 on Tuesday after rebounding overnight from a five-week low.
The pound fell 0.1% to $1.2520 after gaining 0.67% from Monday.
The yen, which had been hit by widening spreads between long-term interest rates in Japan and the United States, emerged on its own from a two-week low.
The dollar fell 0.11% to 135.965 yen after rising to 136.32 yen on Monday.
The 10-year U.S. Treasury yield on the Tokyo market fell overnight from a high of 3.511% to around 3.49%.
The dollar stabilized at CHF 0.89545.
The Australian dollar, which is not included in the dollar index, erased a modest gain early on ahead of China’s retail sales and industrial production data, before falling further after the release. It ended 0.27% lower at $0.6682.
“The Australian rally appears to have been tempered for some time by investor concerns about China’s prospects,” said Westpac’s Callow.
“Today’s data will push the Australian dollar back again,” he added, adding that the Australian dollar could fall to around 0.6645, the lower end of its recent trading range.
The offshore Chinese yuan fell to two-month lows. The dollar climbed 0.14 percent to 6.9674 yuan on Monday after hitting 6.9749 yuan for the first time since March 10.
(This article was corrected in the third paragraph to say that the Dollar Index has retreated from a five-week high instead of a five-month high.)
Reporting by Kevin Buckland Editing by Shri Navaratnam
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