SINGAPORE - The dollar touched a six-month high against the yen on Tuesday as expectations grew that U.S. rates will remain higher for longer and as the debt ceiling impasse kept risk sentiment fragile.
Among a slew of Federal Reserve heavyweights who spoke on Monday, some hinted that the central bank still has more to go in tightening monetary policy.
Minneapolis Fed President Neel Kashkari said that U.S. rates may have to go "north of 6%" in order for inflation to return to the Fed's 2% target, while St. Louis Fed President James Bullard said that the central bank may still need to raise another half-point this year.
Against the Japanese yen, the greenback rose to a near six-month peak of 138.80 in early Asia trade, a reflection of the stark contrast between a still-hawkish Fed and an ultra-dovish Bank of Japan.
"Markets are pricing for higher rates for longer by the Fed," said Tina Teng, market analyst at CMC Markets. "U.S. inflation is still way above the target ... and near-term, the economy is running resilient.
"I don't think the Fed will just start cutting rates anytime soon."
Money markets are pricing in a roughly 26% chance that the Fed will deliver another 25-basis-point rate hike next month, compared to a 20% chance a week ago, according to the CME FedWatch tool.
Expectations of interest rate cuts later this year have also been scaled back, with rates seen holding at around 4.7% by December.
Similarly, the greenback kept the offshore yuan pinned near its recent five-month low and it last bought 7.0547.
China on Monday kept its benchmark lending rates unchanged, as a weakening yuan and widening yield differentials with the United States limited the scope for any substantial monetary easing to shore up the country's post-COVID economic recovery.
The euro slipped 0.05% to $1.0808 and is down nearly 2% for the month thus far against a stronger dollar, reversing two straight months of gains.
Sterling edged 0.02% higher to $1.2440.
Also on investors' minds were concerns over a looming debt ceiling deadline in the United States, which put a lid on risk sentiment and supported the safe-haven U.S. dollar.
President Joe Biden and House Speaker Kevin McCarthy ended discussions on Monday with no agreement on how to raise the U.S. government's $31.4 trillion debt ceiling and will keep talking with just 10 days before a possible default.
"The debt ceiling drama has reached a fever pitch in recent weeks," said economists at Wells Fargo. "The policy disagreements among lawmakers appear wide as we enter crunch time."
Short-end U.S. Treasury yields have jumped, reflecting market jitters, with the yield on the one-month Treasury bill last up more than 10 bps at 5.7921%. Yields rise when bond prices fall.
The two-month Treasury bill yield last stood at 5.3246%, having touched a high of 5.4330% in the previous session.
Against a basket of currencies, the U.S. dollar steadied at 103.27, not far from a roughly two-month high hit last week.
The Aussie rose 0.05% to $0.6656, while the kiwi gained 0.07% to $0.6290.
(Reporting by Rae Wee; Editing by Edwina Gibbs)