Dollar weakens due to unresolved US debt ceiling crisis, inflation figures

The dollar weakened overall on Wednesday after U.S. President Joe Biden and top lawmakers failed to break an impasse on the debt ceiling crisis, although currency moves were modest amid caution ahead of U.S. inflation data later in the day.

Biden and House Speaker Kevin McCarthy split Tuesday after talks about raising the U.S. debt ceiling to $31.4 trillion.

However, the two agreed to further negotiations and agreed to have their aides hold daily talks on possible agreements. Biden, McCarthy and three congressional leaders will meet again on Friday.

The greenback fell in early Asian trade as the euro rose 0.11% to $1.0971 and sterling added 0.1% to $1.2634.

The kiwi rose 0.05% to $0.6338.

“There has been a lot of focus on the debt ceiling issue recently,” said Carol Kang, currency strategist at the Commonwealth Bank (CBA). “I don’t think this issue will be resolved anytime soon, as in the past, issues were usually resolved at the last minute.

“So there could be a little more volatility in the markets…and I think the dollar could weaken further as we’ve seen in the past.”

The US dollar index was down 0.07% at 101.55 against a basket of currencies.

US inflation data kept investors busy, with economists polled by Reuters expecting core consumer prices to rise 5.5% in April.

The stronger-than-expected reading could pose a problem for the Federal Reserve, which last week opened the door to a pause in its aggressive tightening cycle after 10 consecutive rate hikes through March 2022.

“The bar has been set high for the central bank’s response to data surprises in both directions,” said Vishnu Varadhan, head of economics and strategy at Mizuho Bank.

“After expecting some credit tightening from 500 basis point interest rate hikes and a shake-up among regional banks, the central bank is unlikely to tighten further on the basis of merely ‘sticky’ inflation, instead re-accelerating inflation.”

Money markets see an 82% chance the Fed will hold rates at its next meeting in June, and expect rates to be cut by the end of the year in July.

Rising expectations that the central bank will initiate rate cuts later this year have been fueled by the latest pressure on the banking sector from the bankruptcy of Silicon Valley Bank in March.

Elsewhere, the Japanese yen rose 0.1% to 135.11 per dollar.

Bank of Japan (BOJ) Governor Kazuo Ueda said on Tuesday that the BOJ will end its yield curve management policy and start shrinking its balance sheet once inflation becomes more likely to reach its 2% target. The comments did little to help the yen rise.

“What Ueda said was not surprising at all,” said CBA’s Kong. “I think the markets are already expecting the Bank of Japan to take action.”

The Australian dollar rose 0.08% to $0.67675.

Australia’s Labor government announced its first budget surplus in 15 years on Tuesday, thanks to strong job growth and huge mining profits.