US dollar skids as Fed's Powell hints at June pause, debt ceiling talks stall

The dollar fell on Friday after Federal Reserve Chair Jerome Powell struck a moderately dovish stance, contrary to market expectations, saying that given how credit conditions have tightened, the U.S. central bank may not need to raise interest rates as much.

A pause in negotiations to raise the federal government's $31.4 trillion debt ceiling also pressured the dollar.

But it was Powell who caught the market by surprise.

Tighter credit conditions mean that "our policy rate may not need to rise as much as it would have otherwise to achieve our goals," Powell said at a central bank conference in Washington.

The Fed chief reiterated that the central bank would now make decisions "meeting by meeting," but also flagged that after a year of aggressive rate increases, officials can afford to make "careful assessments" of the impact of rate hikes on the economic outlook.

"Powell was not overtly dovish, but he definitely was not hawkish," said Erik Bregar, director, FX & precious metals risk management, at Silver Gold Bull in Toronto.

"So you're seeing bond market cover hawkish bets, same thing with FX. This derails upside momentum in the dollar going into the weekend."

Fed officials this week have more or less pushed against rate-pause bets for June given persistently high inflation.

Following Powell's comments, the rate futures market has priced late on Friday a roughly 16% chance that the Fed raises the benchmark rate at its June meeting by 25 basis points. The rate-hike bet was nearly 40% before the Fed chairman spoke.

The dollar index fell 0.4% to 103.08, after hitting seven-week peaks the previous session. On the week, the dollar posted a 0.6% gain.

The euro rose 0.3% to $1.0806, posting a weekly fall of 0.8% .

"What we're seeing here is position-squaring. Safe to say that people were expecting Powell to be hawkish. We did not get that," Silver Gold Bull's Bregar said. "Momentum in the dollar was bullish, but we're not going into the weekend with guns blazing."

The dollar slid 0.7% against the yen to 137.76 yen , having risen to a six-month peak of 138.745 earlier. The greenback posted 1.7% gain this week, on pace for its biggest weekly percentage rise since mid-February.

At the same time, negotiations between U.S. House of Representatives Republicans and Democratic President Joe Biden's administration about lifting the federal government's $31.4 trillion debt ceiling have been paused, the lead Republican negotiator said while the White House said a deal remains possible.

"Until people are willing to have difficult conversations about how you can actually move forward and do the right thing we're not going to sit here and talk," Representative Garret Graves, House Speaker Kevin McCarthy's designated lead negotiator in talks, told reporters as he walked out of talks on Friday.

The news undermined the dollar.

"This throws cold water on the apparent progress noted yesterday where Speaker McCarthy thought a bill could go to the House in the coming week," wrote Action Economics in a blog.

In China, the yuan slid to its lowest since December to 7.0752 per U.S. dollar in the offshore market, as data offered evidence of a sputtering recovery in the world's second-largest economy. The dollar, however, was last down 0.3% at 6.9539.