Dollar on Defensive After Dovish Powell, Debt Ceiling Setback

TOKYO, Japan (Reuters) – The dollar suffered losses on Monday against the yen as well as the euro after a breakdown in U.S. Debt Ceiling negotiations. Federal Reserve Chair Jerome Powell also indicated a preference for slow rate increases.

The dollar dropped 0.15% at the beginning of the week to 137.715yen, after ending a winning streak of six days on Friday. It also fell from its six-month high.

The euro rose 0.14%, to $1.0822. This extends Friday's gain, which saw it rebound from a seven-week high.

Investors are now awaiting a meeting on Monday between U.S. president Joe Biden, and House Republican Speaker Kevin McCarthy. The two will discuss the debt limit.

The two sides abruptly ended their negotiations on Friday, with Republican negotiators leaving the meeting. Although the talks were eventually resumed, there was no progress made by either side, which caused the dollar to fall.

Currency analysts predict that the Treasury will run out of cash by the ostensible 'X-date' in early June.

"Have We Not Seen This Movie Before?" In a client letter, National Australia Bank's Rodrigo Catril called the situation a "hiccup". Westpac's Sean Callow also described it as such.

Callow said that "the broad outline of a deal is still in sight".

Callow said that the Fed's outlook is likely to drive the dollar. "Powell’s preference for a June pause should overshadow any hawkish remarks from regional Fed presidents. This leaves DXY (the U.S. Dollar Index) as a buy on rallies," he added.

Powell said at a conference of the central bank in Washington, DC on Friday that "our policy rate might not have to be as high as we would otherwise need to achieve our goals" but he also reiterated that all decisions will be taken "meeting-by-meeting."

Money market traders reduced their bets on a June 14th hike to only 9%.

The dollar index (which measures the U.S. currencies against six major counterparts) edged down 0.04% to 103.00 after reaching 103.63 for the first week since March 20.

Westpac's Callow predicts the index will drop to 101 in a few days or weeks "especially with the ECB's continued resolve on inflation."

Christine Lagarde, president of the European Central Bank (ECB), said that officials must "buckle up", for "sustainably higher interest rates", in order to reach its inflation target.

Sterling gained 0.14%, to $1.2464. This is a continuation of its recovery after last week's 3-week low.

The Australian dollar rose 0.06% to $0.6655, while the New Zealand Dollar advanced 0.13% at $0.62835.

In offshore trading, the Chinese yuan remained unchanged at 7.0334 after Friday's recovery from a near six-month low, 7.0750, backed by comments made by the central bank that it would reduce large exchange rate fluctuation.