Dollar weakens in early trade

16 May 2023 , 09:00 AM

The risk of a U.S. default continued to weigh on the dollar on Tuesday, and there were few signs that the deadlock between Democrats and Republicans over extending the debt ceiling would be resolved.

The dollar index, which compares the value of the dollar to a basket of six important rivals, dropped by 0.26% over night and was down from a five-month high of 102.39.

The desire for safe haven assets amid a faltering COVID recovery in China and a surprisingly large increase in market estimates for U.S. consumer inflation helped the dollar last week. These factors increased the likelihood that the Federal Reserve will raise interest rates in June.

But this week, investors’ attention has been drawn to the approaching borrowing limit, which Treasury Secretary Janet Yellen indicated may be reached as early as June 1.

Prior to an anticipated meeting with congressional leaders later on Tuesday, President Joe Biden voiced optimism that an agreement might be reached in time. Kevin McCarthy, the speaker of the Republican-controlled House of Representatives, claimed that the two sides remained far apart.

The euro, which makes up the largest portion of the dollar index, edged up 0.06% to $1.0879 on Tuesday after recovering from a five-week low.

Following a 0.67% increase on Monday, sterling was essentially unchanged at $1.2529.

The greater gap between the long-term yields in the United States and Japan had hurt the yen, but it managed to recover from a nearly two-week low.

After gaining to 136.32 yen on Monday, the dollar fell to 135.915 yen, a loss of 0.13%.

The 10-year Treasury yield decreased from a high of 3.511% overnight to about 3.49% in Tokyo.

To reach 0.8949 Swiss francs, the dollar fell by 0.08%.

Despite recent macroeconomic readings from its primary trading partner showing weak domestic demand, the Australian and New Zealand dollars, which are not included in the dollar index, continued to trade strongly ahead of China retail sales data.

The Australian dollar increased 0.07% to $0.67045 and the kiwi increased 0.16% to $0.62525.

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