© Reuters. FILE PHOTO: A packet of U.S. five-dollar bills is inspected at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron
By Iain Withers
LONDON (Reuters) – The dollar eased on Friday but remained on track for a third straight weekly gain, as markets raised bets on higher-for-longer interest rates to curb sticky inflation and nervously awaited a resolution to last-ditch U.S. debt ceiling talks.
Apparent progress on Thursday in talks between President Joe Biden and top congressional Republican Kevin McCarthy helped ease jitters, but markets remained on edge at any risk of a default ahead of a long bank holiday weekend in the U.S.
“Monday is a bank holiday in the U.S. so market participants will have to wait until Tuesday 30th May to trade positions again so there is a strong belief that Washington needs to make a deal happen today,” currency analysts at MUFG said in a note.
Wall Street traders have become increasingly wary of U.S. government debt securities, but the prospect of an imminent deal helped lift sentiment across markets on Friday and boost more risk-sensitive currencies at the expense of the dollar.
The – which tracks the greenback against six major counterparts – was last down 0.2% on the day at 104.06, just off Thursday’s two-month high of 104.31. It was nonetheless on track for a weekly gain of around 0.8%.
The dollar’s recent momentum has also been driven by raised expectations that the Federal Reserve will have to keep interest rates higher for longer to subdue inflation.
Money markets are now pricing in a 42.5% chance that the Federal Reserve will deliver another 25-basis-point rate hike at its policy meeting next month, while expectations that the Fed will begin cutting rates later this year have been scaled back.
Data released on Thursday showed that the number of Americans filing new claims for unemployment benefits increased moderately last week to 229,000, coming in lower than expectations.
“Recent moves in currencies have been mainly driven by a sharp repricing of FOMC policy,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:) (CBA).
The dollar edged away from a six-month high against the yen and last stood at 139.67, having reached 140.23 yen in the previous session, its highest since November.
The euro and British pound regained some ground, but were struggling to recoup recent losses against the dollar.
It is unclear whether the European Central Bank can lower price growth to its 2% target within two years and inflationary pressures remain persistent in the bloc, Croatian policymaker Boris Vujcic said on Friday.
The single currency was last up 0.1% against the dollar at $1.07350, but was not far from its two-month low of $1.0708 hit in the previous session.
Sterling gained 0.2% to $1.23470, after data showed British consumers picked up spending in April, although the currency was still heading for a weekly loss.
The US dollar extended its gains against major currencies on Friday, headed for its third straight week of growth as investors continued to price in expectations for higher interest rates in the US.
The dollar index, which measures the greenback against a basket of six other major currencies, rose 0.1 percent to 97.7. So far this week, the index is up 0.3 percent. This marks the currency’s third straight week of gains – its longest string of weekly gains so far this year.
The greenback’s gains come on the back of wagers that the US Federal Reserve will push ahead with additional rate hikes this year. Expectations of higher borrowing costs in the US have lifted the currency, sending it to its highest point since May of last year.
In recent weeks, rising inflation and a strong labor market have driven up expectations of additional rate hikes, fueling the dollar’s gains. According to the CME Group’s FedWatch tool, current pricing suggests that the US central bank will hike rates at least two, and possibly three, times during the rest of 2018.
This week, the dollar pushed higher as hawkish comments from Fed policymakers stoked expectations of higher interest rates. The comments included remarks from Fed chair Jerome Powell, who said on Wednesday that “gradual rate increases are the most appropriate path from here.”
In addition, higher US yields have helped attract inflows into the US dollar. US Treasury yields have been rising as investors expect further rate hikes. The yield on the 10-year Treasury note, which hit its highest level since 2011 earlier this week, was last at 3.119 percent.
All factors considered, the markets currently expect at least two more rate hikes from the Fed before the end of the year. This continues to boost the dollar’s appeal and its gains are expected to last throughout the remainder of the year.