Dollar edges lower; debt ceiling talks, Powell's comments in focus

·2 min read - The U.S. dollar edged lower in early European trade Monday amid uncertainty surrounding the U.S. debt ceiling negotiations and after dovish comments from Fed chair Jerome Powell.

At 02:55 ET (06:55 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, dropped 0.1% to 103.020, having retreated from last week’s 103.63 high, a level last seen on March 20.

The dollar received a blow late last week as negotiations over the potential raising of the U.S. debt ceiling, and thus avoiding a very damaging default, suddenly broke down with Republicans walking out of the meeting.

U.S. President Joe Biden and House Republican Speaker Kevin McCarthy are set to meet later Monday, but compromises will have to be made and thus more brinkmanship is to be expected ahead of early June, when the Treasury is seen running out of money.

Also of interest Monday will be comments from FOMC members James Bullard, Thomas Barkin, and Raphael Bostic after Friday’s comments from Fed Chairman Jerome Powell hinted at a pause in the U.S. central bank’s rate-hiking cycle in June.

Tighter credit conditions mean that "our policy rate may not need to rise as much as it would have otherwise to achieve our goals," Powell said at a conference in Washington.

This followed hawkish comments from a number of regional Fed presidents throughout last week, which had raised market expectations for a hike at the next meeting.

EUR/USD rose 0.1% to 1.0819, continuing Friday's bounce from a seven-week low ahead of speeches from European Central Bank officials Luis de Guindos and Philip Lane.

These policy-makers are likely to point to further hikes ahead by the ECB after President Christine Lagarde stated on Friday that the central bank needs to keep interest rates high to curb inflation in the medium term.

"We still have to have sustainably high interest rates, so it's a time when we have to really buckle up and look at this target that we have and deliver on it," Lagarde told Spanish state television TVE.

The ECB has a medium-term inflation target of 2%, while core prices slowed only marginally in April to 7.3% from 7.5%.

GBP/USD traded largely flat at 1.2438, just above last week’s three-week low, AUD/USD fell 0.2% to 0.6633, while USD/JPY fell 0.1% to 137.85, with the Japanese yen helped by the potential for a pause in U.S. interest rate hikes.

USD/CNY rose 0.2% to 7.0225, with the yuan remaining above the psychologically-important 7 level even after U.S. President Joe Biden flagged a potential improvement in Sino-U.S. relations.

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