US dollar index gains as Fed policy, debt ceiling talks in focus

The dollar rose against the Japanese yen on Monday, holding just below a six-month high, as investors waited on fresh data to signal whether the U.S. Federal Reserve is likely to continue hiking interest rates, while watching for news of a congressional deal to raise the U.S. debt ceiling.

The greenback has gained for the past two weeks as stronger than expected economic reports and hawkish Fed officials keep the prospect of further interest rate increases alive.

“The dollar had a nice two-week bounce, helped by rising U.S. interest rates,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

Comments from Fed Chair Jerome Powell on Friday that tighter credit conditions could mean fewer rate hikes pulled the greenback off its highs, however.

“It seemed to me to be the strongest case yet for a pause,” Chandler said. “I look for some broad consolidation as we wait for the next shoe to drop.”

The dollar got a mild boost after St. Louis Fed President James Bullard said on Monday that the Fed may still need to raise its benchmark interest rate by another half-point this year.

Minneapolis Fed President Neel Kashkari also said it was a "close call" whether he would vote to raise interest rates or to pause the central bank's tightening cycle when it meets next month, while San Francisco Fed President Mary Daly said it's too soon to say whether the U.S. central bank will raise rates at the June 13-14 policy meeting.

Atlanta Fed President Raphael Bostic said he was comfortable waiting "a little bit" before deciding on any further moves, while Richmond Fed President Thomas Barkin said he was "still looking to be convinced" that inflation is in a steady decline.

The Fed reported on Monday an annual survey showing that inflation has eroded U.S. households' sense of financial security, with many saying they had reduced their savings to make ends meet, felt less secure about retirement, and had delayed purchases or swapped into cheaper products as they shopped.

The greenback was last up 0.46% on the day at 138.55 yen , just below a six-month high of 138.75 reached on Thursday.

The euro gained 0.12% to $1.0819, having hit a more than seven-week low of $1.0760 on Friday.

The dollar index , which measures the greenback against six other major currencies, was up 0.15% at 103.17, hovering below last week's high of 103.63, a level last seen on March 20.

Investors are also focused on negotiations to raise the U.S. debt limit, with the risk of a default seen as denting risk sentiment even as it is viewed as unlikely.

U.S. President Joe Biden and House of Representatives Republican Speaker Kevin McCarthy will meet on Monday to discuss the debt ceiling, after a phone call on Sunday that both sides described as positive.

"Friday there was a bit of a setback but there's a bit more optimism after the weekend," said Francesco Pesole, FX strategist at ING. "Markets are seeing a deal on the debt limit and at the same time the Fed pushing back on rate cuts which is ultimately proving positive for the dollar."

Sterling was little changed on the day at $1.2442, after hitting a three-week low of $1.2392 on Thursday.

The Aussie was also steady at $0.6652.

The New Zealand dollar rose 0.18% to $0.6288, with traders ramping up bets to 1-in-3 for a half-point hike by the Reserve Bank on Wednesday.

The Chinese yuan weakened to 7.0465 per dollar in offshore trading, creeping back toward Friday's six-month low of 7.0750.

The yuan has been under pressure on growing signs China's post-COVID-19 recovery may already be petering out, but got some respite on Friday after the People's Bank of China pledged to curb large exchange rate fluctuations.