Dollar set for third week of gains as US debt talks loom large

WASHINGTON, May 26 (Reuters) - The dollar was set for a third straight weekly gain on Friday, as markets raised bets on higher-for-longer interest rates and amid closely watched last-ditch talks on the U.S. debt ceiling.

Apparent progress in the talks between President Joe Biden and top congressional Republican Kevin McCarthy helped ease investor jitters, but doubts remained about when both sides would reach agreement.

Biden and McCarthy are closing in on a deal that would raise the government's $31.4 trillion debt ceiling for two years while capping spending on most items, a U.S. official told Reuters ahead of a long holiday weekend in the U.S. But an administration official briefed on the talks warned that "major issues" remained.

The U.S. dollar index , which tracks the currency against six major counterparts, was last down 0.038% on the day at 104.170%.

"There's some positive vibes or at least positive undertones to the debt ceiling talks over the last 24 hours or so," said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.

"I think certainly when it comes to the FX market, that's reverberating via some degree of dollar defensive behavior against some of the more high-risk currencies," he said.

The dollar's recent momentum has also been driven by raised expectations that the Federal Reserve will have to keep interest rates higher for longer to subdue inflation.

U.S. consumer spending increased more than expected in April, jumping 0.8% last month, the Commerce Department said on Friday, boosting the economy's growth prospects for the second quarter.

The personal consumption expenditures (PCE) price index increased 0.4% in April after rising 0.1% in March.

Following the readout, the dollar hit a new six-month high against the yen and last stood at 140.60.

"Recent moves in currencies have been mainly driven by a sharp repricing of FOMC policy," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

Leading European policymakers struck varying tones on the future path of euro zone inflation on Friday, with European Central Bank chief economist Philip Lane pushing back against concerns about core inflation.

"There seems to be a lot more uncertainty with respect to the ECB and what it's going to do when it comes to administering rates over the coming months," said Rai.

The euro was last up 0.11% against the dollar at $1.0731.

Sterling was last trading at $1.2352, up 0.26% on the day, after data showed British consumers picked up spending in April, although the currency was still heading for a weekly loss.

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Currency bid prices at 2:54PM (1854 GMT)