After a debt ceiling deal lifted risk sentiment, the U.S. dollar fell versus a basket of other currencies on Tuesday but remained near a two-month top.

The dollar index, which tracks the U.S. currency versus six major counterparts, lost 0.02% to 104.28, near its two-month high of 104.42 on Friday. The index will rise 2.5% this month.
On Monday, a few hard-right Republican legislators said they would reject raising the $31.4 trillion debt ceiling.

The resistance emphasizes the challenges Democratic President Joe Biden and top congressional Republican Kevin McCarthy would face passing the package through the Republican-controlled House and Democratic-controlled Senate before the cap is reached, likely by next Monday.

“It is as if the two political parties in the U.S. are playing a game of chicken and daring the other side to capitulate,” said Marc Chandler, chief market analyst at Bannockburn Global Forex in New York.
“Still, a higher debt ceiling and some FY24 budget spending reduction are the middle ground.”

The 99-page bill would postpone the debt limit until Jan. 1, 2025, delaying the politically difficult subject until after the November 2024 presidential election. It would also limit government expenditure for two years.

Treasury Secretary Janet Yellen warned Friday that the U.S. would fail if Congress did not raise the debt ceiling by June 5. She earlier predicted a June 1 default.

Until Congress approves the plan, Commonwealth Bank of Australia currency expert Carol Kong predicted a U.S. government default.

“Outside of any volatility generated by the debt ceiling issues, expectations for Fed rate hikes are likely to keep the dollar bid in the near term.”

CME FedWatch shows a 60% possibility of a 25 basis-point rise in June, up from 26% a week earlier.

Besides the debt ceiling vote, OCBC currency strategist Christopher Wong said labor statistics, especially Friday’s payrolls report, would be the focus this week.

“Markets are somewhat assuming that the debt agreement will get blessing from Congress.”

Longer-dated The debt ceiling pact boosted Asian U.S. Treasuries on Tuesday.

Benchmark 10-year rates fell six bps to 3.760%. Thirty-year rates fell 6.4 bps to 3.913%. Rising bond prices lower yields.

Sterling rose 0.04% to $1.2356, while the euro rose 0.01% to $1.0706.

After hitting a six-month low of 140.91 per dollar on Monday, the yen rose 0.11% to 140.31.

CBA’s Kong said hope that the U.S. will avoid default was weighing down the yen, but a strong rise in the dollar/yen may drive Japanese action.

“If Japanese officials boost up rhetoric, (the yen) might abruptly gain in coming weeks. Until then, higher U.S. Treasury rates and weak BoJ tightening forecasts can boost USD/JPY.”

The Aussie lost 0.31% to $0.652 and the Kiwi 0.15% to $0.604.

China’s central bank put the fixing at 7.0971 per dollar, the worst since December. The offshore yuan also fell below 7.1 per dollar.

After President Tayyip Erdogan won Sunday’s election, the Turkish lira fell to a record low of 20.16 per dollar.