Dollar Falls as Fed Stalls; The US debt deal has been approved by the House of Representatives

The dollar slipped after hitting a two-week high against its major peers on Thursday as investors cut bets on an interest rate hike by the Federal Reserve this month, though the impending expiration of debt provided support for the safe-haven dollar.

A divided US House of Representatives on Wednesday passed a bill to suspend the $31.4 trillion debt ceiling. Attention is now turning to how the Democratic-led Senate will receive that bill days before the federal government runs out of money to pay its bills.

The dollar was mixed in Asian trading and barely reacted to the vote, as the euro rose 0.04% against the dollar to $1.06895.

The pound fell 0.01% to $1.2440.

The dollar index rose 0.06% to 104.21, although it was still down from a more than two-month high hit in the previous session as traders downplayed expectations of another rate hike by the Federal Reserve this month.

Fed officials, including the vice-chair-appointed, indicated that a rate hike would be delayed until June, giving the US central bank time to assess the impact of the tightening cycle so far against the still-strong inflation data.

According to CME’s FedWatch tool, markets are currently pricing in about a 26% chance that the Fed will raise rates by 25 basis points at its next meeting, up from about 67% the day before.

“The latest round of US economic data favors more short-term hikes in interest rates, although we think the FOMC has already completed the current tightening cycle,” said Carol Kong, currency analyst at Commonwealth Bank of Australia.

Elsewhere, the Japanese yen rose nearly 0.1% to 139.24 against the dollar.

Japanese financial authorities met earlier this week after the yen fell to a six-month low against the US dollar. The country’s top diplomat said Japan would closely monitor the currency’s movements and would not rule out any options.

China shale recovery

In Asia, the offshore Chinese yuan rose more than 0.1% to 7.1077, recouping some of its losses from the previous session, when it fell to a six-month low.

Chinese factory activity unexpectedly increased

unexpected

To growth in May, after a decline in April, a survey of the private sector on Thursday showed that, thanks to improved production and demand, the help of troubled companies hit by the collapse of profits.

The yuan fell nearly 3% against the dollar in both onshore and offshore markets in May as China’s post-COVID economic recovery struggles to gain momentum.

Official manufacturing Purchasing Managers’ Index (PMI) data on Wednesday showed that Chinese factory activity contracted faster than expected in May, falling to 48.8, its lowest level in five months.

“On a net basis, the path of least resistance for USD/CAD is to the upside given the negative RMB load, slowing China’s reopening momentum and foreign capital outflows,” said Christopher Wong, currency analyst at OCBC.

Weak economic data from China also sent the Australian and New Zealand dollars down to their lowest levels in more than six months in the previous session, as the two currencies struggled to recoup their losses on Thursday.

The Australian dollar rose 0.02% to $0.6505, while the New Zealand dollar fell 0.07% to $0.6017. Antipodean coins are often used as liquid substitutes for the yuan.

“Until a broader stimulus package is unveiled, the yuan will not find supply, especially with the People’s Bank of China expected to ease monetary policy first,” said Macquarie strategists.

Inevitably, further weakness in the yuan could put more upward pressure on the dollar against other currencies, extending the dollar’s strength seen since the beginning of May.