Dollar Plunges as Markets Focus on Debt Ceiling Talks

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Dollar Plunges as Markets Focus on Debt Ceiling Talks
US Dollar

Dollar Plunges as Markets Focus on Debt Ceiling Talks

The United States dollar weakened against other major currencies as markets shift attention to debt ceiling talks after the standoff. Global markets entered the new trading week in a cheery mood.

On Tuesday, Wall Street cruised higher as investors piled into tech and semiconductor shares; while commodity prices staged a cautious recovery, shrugging off a gloomy manufacturing survey from the United States.

In May, manufacturing activity collapsed according to the Empire State survey with new orders falling sharply, which is usually an omen for weaker growth ahead. Investors did not seem particularly concerned though, as it’s no secret that the manufacturing sector is struggling with a post-pandemic hangover.

The Nasdaq Composite rose by 0.66% to close at its highest levels since August, extending a rally that has been fueled by speculation for Fed rate cuts later this year and stronger-than-expected earnings. Liquidity injections from the Japanese and Chinese central banks over the past few quarters have also been instrumental, as they have eclipsed the Fed’s liquidity drain via quantitative tightening.

Still, the outlook for equity markets remains challenging in an environment where valuations are stretched while earnings growth is stagnant or negative. With stock markets almost priced for perfection, there is little room for error, according to analysts.

Dollar turns down ahead of debt ceiling talks

In the FX complex, the underlying theme was a softer US dollar, in a session characterized by disappointing data releases and a barrage of Fed speakers. The sense among Fed officials is that another rate increase in June is still in play, although the bar for delivering it is high.

Market participants are saying that’s not very realistic, pricing in a mere 15% probability of a rate hike next month and rate cuts for the remainder of the year. Therefore, there might be a time window for the dollar to stage a comeback in the coming weeks, if incoming US data validate the prospect of another rate increase or push back against the notion of imminent rate cuts.

The fireworks will continue today with the release of US retail sales for April and another round of debt ceiling negotiations between President Biden and Republican Speaker McCarthy. Retail sales are projected to rebound by 0.8% in April, although monthly card spending data from Bank of America spell some downside risks around this forecast.

On the debt ceiling issue, the two sides remain far apart, so it is unlikely a deal will be reached before the early-June deadline where the government is set to run out of cash. In reality, some extraordinary measures can delay default for a few weeks, so the true X-date is closer to July. Market stress so far has been contained in short-term Treasury bills and credit default swaps, although there’s a risk of spillovers in other assets as the X-date approaches.

Chinese data disappoints

A batch of surprisingly weak data releases out of China is in focus today. As telegraphed by business surveys, the Chinese economic data pulse weakened in April.

Retail sales and industrial production fell short of forecasts, even though the yearly numbers rose sharply from a year ago, when much of the economy was locked down. The data suggests that the reopening boom has started to fade and Chinese authorities might need to resort to greater stimulus measures to hit their growth targets.

Beyond the US events, other highlights today include the Canadian CPI report and a stream of Fed speakers such as Mester, Bostic, Barkin, Barr, Williams, and Logan. #Dollar Plunges as Markets Focus on Debt Ceiling Talks

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