Dollar retreats in early trade as traders factor in a pause in the rate hike cycle

1 Jun 2023 , 10:29 AM

As investors reduced their wagers that the Federal Reserve will raise interest rates this month, the dollar fell from a two-week high against its key counterparts on Thursday. Nevertheless, the approaching debt ceiling deadline supported the greenback as a safe haven currency.

A bill to suspend the $31.4 trillion debt ceiling was passed by a divided U.S. House of Representatives on Wednesday; now, attention is on how it will fare in the Democratic-led Senate just days before the federal government is anticipated to run out of money to pay its obligations.

The dollar fluctuated in Asian trading and hardly responded to the vote, with the euro increasing by 0.04% to $1.06895 against the dollar.

Sterling fell 0.01% to $1.2440.

As traders reduced their expectations of a rate hike by the Federal Reserve this month, the U.S. dollar index increased by 0.06% to 104.21, although it was still down from a more than two-month high reached in the previous session.

In order to give the U.S. central bank time to evaluate the impact of its tightening cycle thus far against still high inflation readings, Fed officials, including the vice chair-designate, indicated that a rate hike ‘skip’ would occur in June.

According to the CME FedWatch tool, markets are currently pricing in a roughly 26% likelihood that the Fed will raise rates by 25 basis points at its forthcoming meeting, down from a nearly 67% chance yesterday.

Elsewhere, the Japanese yen gained over 0.1%, reaching 139.24 per dollar.

Following the yen’s decline to a six-month low versus the dollar, Japan’s financial authorities convened earlier this week. The top diplomat of the nation said that Japan will closely monitor currency movements and won’t rule out any possibilities.

The Chinese offshore yuan gained more than 0.1% in Asia, reaching 7.1077, erasing some of the previous session’s losses that saw it fall to a six-month low.

A private sector poll on Thursday revealed that China’s manufacturing activity unexpectedly turned upward in May after falling in April. This change was caused by increased production and demand, which aided struggling businesses that had been hurt by declining profitability.

In May, the yuan lost close to 3% of its value versus the dollar in both domestic and international markets as China’s post-COVID economic recovery sputtered to life.

According to data released on Wednesday from the official manufacturing purchasing managers’ Index (PMI), industrial activity in China decreased more quickly than anticipated in May, hitting a five-month low of 48.8.

The Australian and New Zealand dollars fell to their lowest levels in more than six months in the previous session as a result of the bad economic statistics coming out of China, and both currencies struggled to recover their losses on Thursday.

The Kiwi lost 0.07% to $0.6017, while the Australian dollar increased 0.02% to $0.6505.

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