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Debt ceiling debate puts a floor under dollar

Euro surrenders more ground while sterling is anchored near lows. Canadian consumer spending looms large for C$.

Global overview

The U.S. dollar sat atop multiweek highs ahead of fresh news on the world’s largest economy. The firmer buck held near three- and six-week peaks versus sterling and euro, while it hovered around 2023 peaks against the yen. Canada’s dollar pared some of its weekly gain as the price of oil moderated but held above $72. The dollar has found room to run with attention on the U.S. debt ceiling debate and the outlook for Federal Reserve policy. The market sees positives for the dollar whether the debt situation improves or worsens ahead of the early June deadline to raise America’s borrowing limit. A potential debt default could deal a significant blow to the world economy that it stokes safety buying of the greenback. Constructive negotiations, on the other hand, that avoid a cataclysmic outcome are also positive for the buck, a scenario that would reduce economic uncertainty and further weaken the case for the Fed to cut rates. The buck’s highest level in seven weeks may be tested by U.S. numbers today on weekly jobless claims and the Philly Fed index of mid-Atlantic business conditions. Mexico will decide at 3 pm ET whether to raise borrowing rates from record high levels of 11.25%.

Euro surrenders more ground

Revived worries about European growth continued to weigh on the euro as it slipped to another six-week low versus the greenback. The euro’s retreat from recent one-year highs gathered pace this week after German investor confidence darkened more than expected in May when it turned negative for the first time this year. Many worry that continued interest rate hikes by the ECB could do more harm to growth than offer yield support for the euro. At the same time, markets have pared back expectations for the Fed to cut interest rates this year given a recent run of resilient U.S. data.

Chart: The US dollar peak has past, but dollar still strong. US dollar index - weekly intervals.

Sterling anchored near lows

Sterling kept toward the bottom of its range against the U.S. dollar and its lowest terrain in three weeks. The pound’s bull run has petered out amid concerns that further inflation-strangling interest rate hikes by the Bank of England could send the UK economy into a hard landing scenario in which growth slows abruptly and unemployment rises. Meanwhile, data this week showing a surprise uptick in UK unemployment has added traction to pound-negative economic uncertainty.

Chart: BoE forecast tracks inflation expectations. UK inflation and CBI* selling price expectations.

*Confederation of British Industry.

Canadian consumer spending looms large for C$

Canada’s dollar maintained a modest weekly gain against the U.S. dollar after domestic data this week showing the first increase in inflation in nearly a year reopened the door for the Bank of Canada to raise interest rates from 4.50%. Canada’s rate debate could be a fluid one, particularly if Canadian retail sales Friday contract for a second straight month in March, an outcome that would show higher borrowing rates biting the economy, a potential negative for the loonie. Meanwhile, better than expected U.S. data kept the dollar and Treasury yields biased higher. Weekly jobless claims improved more than expected to 242,000, down from the prior week’s 1 ½ year high of 264,000. The Philly Fed index of mid-Atlantic manufacturing activity contracted less than expected, while the sub-index of inflation accelerated, news that will weaken the case for the Fed to cut lending rates.

Chart: C$ buoyed by rate hike-friendly data. USD/CAD 12-month historical, weekly intervals.

Dollar sits atop weekly ranges

Table: rolling 7-day currency trends and trading ranges

Table: Rolling 7-day currency trends and trading ranges.

Key global risk events

Calendar: May 15-19

Table: Key global risk events calendar.

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.

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