Dollar nudges lower as U.S. debt ceiling deal dents safe-haven appeal

Dollar nudges lower as U.S. debt ceiling deal dents safe-haven appeal

By Dhara Ranasinghe

LONDON (Reuters) -The dollar nudged lower on Monday, pulling back from six-month peaks against the yen as a U.S. debt ceiling deal lifted risk appetite across world markets and dented the greenback’s safe-haven appeal.

U.S. President Joe Biden on Sunday finalised a budget agreement with House Speaker Kevin McCarthy to suspend the $31.4 trillion debt ceiling until Jan. 1, 2025, and said the deal was ready to move to Congress for a vote.

Having briefly touched a six-month high of 140.91 yen during Asia trade, the dollar drifted lower and was last down 0.25% at 140.25 yen.

The dollar index, which measures the U.S. unit’s value against a basket of other major currencies, was also a touch softer around 104.22 but not far from last week’s two-month peaks.

The pull-back in the safe-haven dollar came as world stocks rallied on the positive news from Washington, although trade was generally subdued with parts of Europe, including Britain, on holiday. Monday was also a holiday in the United States.

“An initial risk-on reaction is likely as the cloud of U.S. default has retreated,” said Charu Chanana, a market strategist at Saxo Markets in Singapore.

“But focus will quickly turn to the fact that getting the deal is only a step in the process and an agreement from both the House and Senate by June 5 is still a big ask.”

The agreement would suspend the debt limit through January 1 of 2025, cap spending in the 2024 and 2025 budgets, claw back unused COVID funds, speed up the permitting process for some energy projects and include extra work requirements for food aid programmes for poor Americans.

SPAIN ELECTION

In Europe, the euro was down just 0.14% at $1.0717, showing little immediate reaction to news of a snap election in Spain.

Spanish Prime Minister Pedro Sanchez said on Monday the vote would take place on July 23 after his left-wing coalition government suffered heavy losses in regional ballots on Sunday.

Upbeat world sentiment pushed the risk-sensitive Australian and New Zealand dollars off last week’s six-month lows.

The Aussie rose 0.3% to $0.6539, while the kiwi edged 0.2% higher to $0.6058.

“We’ve got a risk-positive response so far to the debt deal news,” said Ray Attrill, head of FX strategy at National Australia Bank.

“Obviously there’s still the need to get this debt deal over the line, but I think markets are happy to travel on the presumption that it will get done before the new X-date.”

U.S. Treasury Secretary Janet Yellen had on Friday said the government would default if Congress did not increase the $31.4 trillion debt ceiling by June 5, having previously said a default could happen as early as June 1.

Talk that the U.S. rate hiking cycle may not be over as soon as hoped given signs of economic strength have bolstered the dollar this month and could support the currency even as U.S. debt ceiling worries abate.

The dollar was on course for a monthly gain of about 3% against the Japanese currency. The dollar index has gained 2.5% in May.

Data released on Friday showed that U.S. consumer spending increased more than expected in April and inflation picked up, adding to signs of a still-resilient economy.

Money markets price in a roughly 62% chance that the Fed will raise rates by 25 basis points in June, versus a roughly 26% chance a week ago.

Elsewhere, the Turkish lira touched a fresh record low at 20.08 per dollar after President Tayyip Erdogan secured victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.

(Reporting by Dhara Ranasinghe in London and Rae Wee in Singapore; Editing by Emelia Sithole-Matarise and Andrew Heavens)