Dollar firm as traders await more rate hikes

The dollar was firm on Monday as economic resilience in the United States raised market expectations for further rate hikes by the Federal ReserveFederal Reserve, while news that a debt ceiling deal had been finalised sparked some risk-on sentiment.

The value of the yen rose to a fresh record high of140.91 yen in early Asia trade and was expected to lead to a monthly gain of more than 3% against the Japanese currency.

The yen's recent decline has come from rising U.S. Treasury yields, as bets grow that interest rates in the U.S. would stay higher for longer.

U.S. consumer spending increased more than expected in April and inflation increased, adding to signs of a still-resilient economy.

The three-year yield, which typically reflects near-term interest rate expectations, rose more than 10 basis points to an over two-month high of 4.639% on Friday. U.S. Treasuries were untraded in Asia today due to the Memorial Day holiday in the United States, while futures were generally steady. The expected yield for the five-year futures was 3.84%.

The UK market is closed on Monday for a holiday.

In contrast to the dollar, the euro fell 0.13% to $1.0719, while sterling slipped 0.07% to $1.2342.

Whether the dollar sustains the rally that we're seeing, I think it'll depend on particularly the wages data, or average earnings within Friday's payrolls report, and obviously we've got CPI before the Fed as well, NAB spokeswoman Ray Attrill said. The CME FedWatch tool has predicted that the Fed will raise rates by 25 bps in June, compared to a roughly 17% chance a week ago.

Investor sentiment in Asia was buoyed by news that President Joe Biden has finalized a budget agreement with House Speaker Kevin McCarthy to extend the debt ceiling from Jan. 1, 2025 to Jan. 1, 2025.

Biden said the deal was ready to go to Congress for a vote.

The risk-sensitive Australian and New Zealand dollars edged slightly higher, with the Aussie up 0.17% to $0.6529.

We've got a risk-positive response so far to the debt deal news, said NAB's Attrill.

Obviously there's still the need to get this debt deal over the line, but I think markets are happy to travel on the presumption that it will get done before the new X-date. U.S. Treasury Secretary Janet Yellen had on Friday said the government would default if Congress didn't increase the $31.4 trillion debt ceiling by June 5. Previously, the government had said a default could happen as early as June 1.

The U.S. dollar climbed 0.02% to 104.29 in relation to a basket of currencies.

The Turkish lira was still under pressure at 20.04 per U.S. dollar, after it had fallen to a record low of 20.06 per dollar on Friday.

On Sunday, President Tayyip Erdogan secured victory in the nation's presidential election, extending his increasingly authoritarian rule into a third decade.