Resilient US economy and haven demand rises Dollar in early trade

25 May 2023 , 09:19 AM

On Thursday, the dollar rose to a two-month high against the euro and a six-month high against the yen as traders reduced their expectations on rate cuts this year due to the robust U.S. economy.

Paradoxically, the U.S. debt ceiling standoff threatens a calamitous default as soon as June 1, when the Treasury has warned it will not be able to pay all of its debts. The desire for safe haven assets has boosted the dollar.

For the first time since March 24 early in the Asian session, the dollar topped $1.07425 per euro, and it remained high until last trading at $1.0748. The dollar also purchased 139.66 yen, which was last reached on November 30.

Investors are growing more anxious as there is only one week till the ‘X-date’ for a debt ceiling agreement and a divided Congress needs more time to pass legislation.

The threat of an impending catastrophe was increased on Wednesday when Fitch placed the ‘AAA’ debt ratings of the United States on negative watch.

A two-month high of 104.01 was reached by the U.S. dollar index, which compares the dollar to six significant rivals, including the euro and the yen.

The latest indication of Europe’s fragility came from a worse-than-anticipated decline in business confidence in Germany.

In the meantime, the Chinese yuan repeated a six-month low on the offshore market, falling to 7.0827 per dollar.

A series of unimpressive economic indicators have been reported for the Asian powerhouse, all of which point to weak consumer demand and indicate that the post-pandemic recovery has already peaked.

Due to its tight trading links with China, Australia’s dollar has felt the effects of that depreciation very strongly, dipping to a new 6 1/2-month low of $0.6527.

After the central bank’s shocking dovish tack on Wednesday, which precipitated a 2.2% decline, the New Zealand currency was still reeling. It dropped to $0.6085 on Thursday, its lowest level since the middle of November.

The Federal Reserve’s aggressive tightening campaign hasn’t been able to break the U.S. economy’s resiliency, and expectations for rate decreases this year have been reduced from as much as 75 basis points to only a quarter point as of December.

Money markets increased the odds of another quarter-point boost in June to approximately 1-in-3, with numerous Fed officials recently adopting a hawkish stance as consumer inflation is still running above the 2% objective.

The way the data come in over the next three weeks will determine whether we increase or skip the June meeting, Fed Governor Christopher Waller said on Wednesday at a gathering in California.

I oppose halting rate increases unless there is indisputable proof that inflation is reducing towards our 2% goal.

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