SINGAPORE: The U.S. dollar held near a two-month high on Wednesday on safe-harbour demand as negotiations over raising the U.S. debt ceiling dragged on with no imminent resolution in sight.
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.
"Progress on a deal is proving difficult and market jitters are increasing," said Harry Ottley, an economist at Commonwealth Bank of Australia, noting that markets sentiment is closely aligned with progress on the negotiation.
The dollar index, which measures the U.S. currency against six key rivals, was fetching 103.51 in early Asian hours, just under the 103.65 two-month peak it touched overnight. The index is up roughly 2% in May.
The yen was flat at 138.58 per dollar, having touched a six-month low of 138.91 overnight, while sterling was last trading at $1.2424, up 0.11% on the day.
Hawkish rhetoric from Federal Reserve officials has also buoyed 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, to follow up 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."
The kiwi was 0.03% higher at $0.6249 ahead of the policy rate decision from the Reserve Bank of New Zealand due around 0200 GMT.
"Despite being 20 months into its tightening cycle, we expect the RBNZ to deliver yet another outsized 50 bp hike today," said Carol Kong, a currency strategist at CBA. "Even if the RBNZ opts for a 25 bp hike, it will likely signal more tightening and revise up its cash rate forecasts." The Australian dollar was steady at $0.6610.
(Reporting by Ankur Banerjee in Singapore Editing by Shri Navaratnam)