Dollar steady as debt ceiling worries weigh; Kiwi slips 1%

The U.S. dollar eased on Wednesday but remained close to a two-month high as negotiations over raising the U.S. debt ceiling dragged on, while the kiwi dived 1% after New Zealand’s central bank surprised markets by flagging an end to rate hikes, Reuters reported.

The Reserve Bank of New Zealand raised interest rates by 25 basis points, as expected, to the highest in more than 14 years at 5.5% and its policy statement forecast that rate would prevail until June, 2024 – unchanged from the earlier forecast.

“The RBNZ was surprisingly dovish in its messages and forecasts,” said Carol Kong, currency strategist at Commonwealth Bank of Australia (CBA). “In contrast to market expectations, the RBNZ kept its projected cash rate peak at 5.50% and signalled its tightening cycle is over.” The New Zealand dollar slipped 1.3% to near three week low of $0.6165 after the decision.

The Australian dollar eased 0.24% to $0.659. Meanwhile, the impasse in Washington over the debt ceiling negotiation has helped lift the dollar, even though it could lead to a default and push the country into recession, as investors reckoned that could spell worse trouble for the global economy.

The dollar index, which measures the U.S. currency against six key rivals, was at 103.43 in Asian hours, not far from the 103.65 two-month peak it touched overnight. Treasury Secretary Janet Yellen has warned that the federal government could no longer have enough money to pay all its bills as soon as June 1, raising the risk of a damaging default.

Investors largely shunned riskier investments as another round of talks between the White House and the Republicans to raise the borrowing limit ended on Tuesday with no sign of progress.

“While the probability of a technical default is very low, it appears to be materially higher than in past debt ceiling stand-offs due to the current political landscape,” said Jake Jolly, head of investment analysis at BNY Mellon Investment Management.

“Moreover, it’s unclear what shape a debt deal will take and the impact on the fiscal outlook.” Elsewhere, the yen strengthened 0.11% to 138.42 per dollar, having touched a six-month low of 138.91 overnight, while euro was up 0.09% to $1.0778.

Sterling was last trading at $1.2431, up 0.17% on the day, after touching a one month low of $1.2373 on Tuesday. Investors will watch out for inflation data from UK that will showcase whether prices have eased.

Hawkish rhetoric from Federal Reserve officials has also lifted the dollar, with traders anticipating interest rates to stay elevated for longer.

Markets are pricing in a 27% chance of a 25 basis point hike in June, CME FedWatch tool showed, after the Fed’s quarter point increase earlier this month. Investors will get more clues on policy from the minutes of the Fed’s May meeting, due later in the global day.

“We suspect the base case among the leadership of the committee is that the tightening cycle is probably over,” said Kevin Cummins, chief economist at NatWest Markets.

“Recent rhetoric from a few officials seem interested in additional hike(s), and this sentiment may well have been reflected in the tone of the minutes.”