US economy, dollar surges amid buoyant demand

US dollars and euro bills are pictured in Brest, western France on September 6, 2022.

Fred Danno | Afp | Good pictures

The dollar pushed to a two-month high against the euro and a six-month high against the yen on Thursday, as the U.S. economy eased, leading traders to hedge their bets on rate cuts this year.

The greenback has also benefited from demand for safe havens, ironically as the US debt ceiling impasse threatens a catastrophic default on June 1, with the Treasury warning it may not be able to pay all its bills.

The dollar touched $1.07425 to the euro early in the Asian session for the first time since March 24, and was last traded higher at $1.0748. The dollar also bought 139.66 yen, which was last seen on November 30.

With only a week to go until the „X-date” for the debt ceiling resolution, and a divided Congress needing several days to enact legislation, investors are increasingly confused.

Fitch put the US’s „AAA” credit ratings on negative watch on Wednesday, adding to the sense of imminent crisis.

„The dollar has seen a nice, solid move, and for good reasons,” said Tony Sycamore, analyst at IG Markets, pointing to demand especially amid the debt ceiling standoff and growing signs of a slowdown in China. and Europe.

„I believe the dollar will appreciate another 2%, and Fitch could be a catalyst for that.”

The U.S. dollar index, which measures the currency against six major peers including the euro and yen, hit a two-month high of 104.01.

Sycamore said a standard interval index test above 104 could see 106.

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A worse-than-expected decline in German business confidence is the latest sign of weakness emanating from Europe.

Meanwhile, the Chinese yuan fell to 7.0827 per dollar in the offshore market and hit a fresh six-month high.

The Asian giant has seen a series of disappointing economic indicators, all of which point to sluggish consumer demand and a post-pandemic recovery that has already run its course.

The Australian dollar felt the brunt of China’s weakness due to its close trade ties, hitting a fresh 6 1/2-month low of $0.6527.

The New Zealand dollar fell 2.2% on Wednesday after a central bank shock triggered a dovish tilt. On Thursday, it fell to $0.6085, its lowest level since mid-November.

A sluggish U.S. economy in the face of an aggressive tightening campaign by the Federal Reserve cut expectations for rate cuts this year by a quarter point in December, from 75 basis points previously.

Money markets rebounded to 1-in-3 the odds of another quarter-point hike in June, with many central bank officials striking a hawkish stance recently with consumer inflation running more than twice the 2% target.

„Whether we hike or skip the June meeting will depend on how the data comes in over the next three weeks,” Federal Governor Christopher Waller said at an event in California on Wednesday.

Until we have clear evidence that inflation is moving towards our 2% target, I do not support holding off on rate hikes.

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