By Herbert Lash and Alun John
NEW YORK/LONDON (Reuters) – The dollar hit a fresh two-month high against a basket of peers on Wednesday as a resilient U.S. economy helped to bolster the currency, while unease over debt ceiling talks in Washington kept investor flows moving to safe havens.
The impasse in Washington over debt ceiling negotiations has helped to lift the dollar, even though it could lead to a default and push the U.S. economy into recession as investors fear it might spell worse trouble for the global economic outlook.
Central bank policy divergence has been a popular theme among FX investors this year, with a recent outlook suggesting the Federal Reserve would start cutting rates soon, said Joe Manimbo, senior market analyst at Convera in Washington.
“If you consider global data of late, it’s painting a more resilient picture of the U.S. economy than what’s going on in Europe,” he said. “That could allow the dollar to maintain its yield advantage for longer,” Manimbo said.
Federal funds futures show a 28.6% probability the Fed raises rates when a two-day policy meeting ends on June 14, according to CME Group’s FedWatch tool.
The dollar index, which tracks the U.S. currency against six major peers, hit 103.91, its highest since March 20. The index last rose 0.299% at 103.83.
Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said he doubts the debt ceiling negotiations have been a big factor in the foreign exchange market.
“The U.S. dollar has been rallying more or less for three weeks helped by stronger-than-expected data and rising U.S. interest rates,” he said.
Economic data could continue to support the dollar, as the Atlanta Federal Reserve Bank projects the U.S. economy is growing at a 2.9% clip in the second quarter, Chandler said.
“My sense would be that we don’t get an agreement until the very last minute anyway, which means not Memorial Day, but sometime early next week,” he said.
The pound dropped to a one-month low against the dollar of $1.23645 and was last just above that, down 0.19%, after data showed British inflation slowed by much less than markets had been expecting.
The British currency lost ground against the euro too, which was last down 0.25% at 1.1492.
Core eurozone services inflation reported on Tuesday remained elevated, hurting Sweden’s crown, as the European Central Bank is poised to raise interest rates in June and July.
The Swedish currency hit 11.541 crowns per euro, its weakest against the common currency since March 2009.
New Zealand’s dollar, meanwhile, slipped after the central bank signalled it was done tightening after raising rates by 25 basis points to the highest in more than 14 years.
The dollar strengthened 0.82% against the crown, while the New Zealand dollar slid 2.29% against the U.S. currency to 0.61050.
Higher inflation, leading to higher for longer Bank of England rates, had supported the pound in recent months but that relationship is now starting to reverse.
“We’re now in that realm where if the Bank of England does meet market expectations and take interest rates that high, we’re talking about a worsening of the UK investment outlook, and financial stability considerations coming into view, which is negative for UK assets,” said Simon Harvey, head of FX analysis at Monex Europe.
Currency bid prices at 12:59 p.m. (1659 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Dollar index 103.8300 103.5400 +0.30% 0.329% +103.9100 +103.3400 Euro/Dollar $1.0756 $1.0771 -0.14% +0.38% +$1.0801 +$1.0748 Dollar/Yen 139.3000 138.5950 +0.51% +6.25% +139.3800 +138.2350 Euro/Yen 149.84 149.25 +0.40% +6.80% +149.9000 +148.8500 Dollar/Swiss 0.9059 0.9016 +0.47% -2.03% +0.9066 +0.9005 Sterling/Dollar $1.2371 $1.2416 -0.36% +2.29% +$1.2469 +$1.2358 Dollar/Canadian 1.3593 1.3503 +0.67% +0.32% +1.3602 +1.3497 Aussie/Dollar $0.6537 $0.6611 -1.10% -4.09% +$0.6615 +$0.6530 Euro/Swiss 0.9743 0.9706 +0.38% -1.54% +0.9751 +0.9705 Euro/Sterling 0.8692 0.8676 +0.18% -1.72% +0.8710 +0.8650 NZ $0.6104 $0.6248 -2.30% -3.86% +$0.6256 +$0.6094 Dollar/Dollar Dollar/Norway 10.9730 10.9450 +0.30% +11.86% +11.0010 +10.9370 Euro/Norway 11.8020 11.7949 +0.06% +12.52% +11.8480 +11.7743 Dollar/Sweden 10.7207 10.6145 +0.77% +3.00% +10.7309 +10.6023 Euro/Sweden 11.5271 11.4392 +0.77% +3.43% +11.5444 +11.4354