The U.S. dollar saw gains in early European trading on Wednesday, bolstered by hawkish remarks from several Federal Reserve officials and ongoing concerns about the debt ceiling standoff in Washington.
At 03:10 ET (07:10 GMT), the Dollar Index, which measures the dollar against a basket of other major currencies, rose by 0.2% to 102.560.
The dollar has been benefiting from the uncertainty surrounding a potential U.S. default if an agreement to raise the country's borrowing limit is not reached. President Joe Biden's meeting with Republican House Speaker Kevin McCarthy on Tuesday provided some optimism about a deal, but no conclusive decisions were made.
Biden warned that the lack of a deal could push the U.S. economy into recession, making the dollar attractive as a safe-haven currency given its global impact.
Analysts at ING noted that the potential negative spill-over into risk sentiment and money markets could significantly strengthen the dollar and the yen in such a scenario.
Further boosting the dollar were hawkish comments from Fed policymakers, indicating that the central bank may raise interest rates again. While the Federal Reserve recently raised rates for the 10th consecutive time, it hinted at a possible pause in its aggressive policy tightening as it assesses incoming economic data.
Cleveland Fed President Loretta Mester stated on Tuesday that, based on current data, she could not determine whether the next move in interest rates would be an increase or decrease, highlighting the stubbornness of inflation.
The euro slipped 0.1% against the dollar to 1.0856 ahead of the release of final April CPI data for the eurozone, which is expected to show elevated prices.
The ongoing U.S. debt-limit saga and the strength of the dollar will continue to drive EUR/USD, with ING identifying 1.0800 as a crucial support level that, if broken, could signal a significant deterioration in market sentiment.
GBP/USD fell 0.3% to 1.2454 as the U.K. unemployment rate unexpectedly rose in March, increasing the likelihood of the Bank of England pausing its series of interest rate hikes at its next meeting in June.
USD/JPY rose 0.3% to 136.79, hitting a two-week peak overnight. AUD/USD fell 0.1% to 0.6649, while USD/CNY rose 0.2% to 6.9928, with the yuan weakening to its lowest level since mid-December due to growing expectations of further monetary policy easing by the People's Bank of China to support economic growth.
