(Corrects to dollar index retreated from 5-week high, not
5-month high, in paragraph 3)
By Kevin Buckland
TOKYO, May 16 (Reuters) - The U.S. dollar remained under
pressure on Tuesday, weighed down by the risk of a U.S. default
as a standoff between Democrats and Republicans over raising the
debt ceiling showed few signs of being resolved.
The Aussie dollar flipped from early small gains to a loss
after economic data from key trading partner China fell short of
analysts' forecasts, adding to evidence of a sputtering COVID
recovery.
The U.S. dollar index - which measures the currency
against a basket of six major peers - was little changed at
102.46, after sliding 0.26% overnight and retreating from a
five-week high.
The dollar had been buoyed last week by both safe-haven
demand amid weak Chinese economic data and by a surprise jump in
U.S. consumer inflation expectations, putting the risk of a June
Federal Reserve rate rise back in play.
This week, though, the looming borrowing limit - which
Treasury Secretary Janet Yellen reiterated could be hit as soon
as June 1 - has forced its way to the front of investor minds.
President Joe Biden expressed confidence a deal could be
done in time ahead of an expected meeting with congressional
leaders later on Tuesday. However, Republican House of
Representatives Speaker Kevin McCarthy said the two sides were
still far apart.
"U.S. dollar price action has been very messy in recent
days, reacting sharply to data," said Sean Callow, a senior FX
strategist at Westpac.
"There is also arguably some debate over what increased
stress over the debt ceiling means for USD," he added. "JPY and
CHF seem likely beneficiaries, but we have numerous historical
examples of global market trauma caused by the U.S. that
actually sees the dollar strengthen."
Westpac sees the potential for the dollar index to drop to
around 101.05 in the near term.
The euro , which has the greatest weight in the
dollar index, was little changed at $1.0873 on Tuesday, after
bouncing off a five-week low overnight.
Sterling slipped 0.1% to $1.2520, following a 0.67%
rally from Monday.
The yen, which had been hit by the wider spread between U.S.
and Japanese long-term yields, pulled itself off a nearly
two-week low.
The dollar lost 0.11% to 135.965 yen after rising
to 136.32 on Monday.
The 10-year Treasury yield eased to around 3.49%
in Tokyo from as high as 3.511% overnight.
The dollar was steady at 0.89545 Swiss franc .
The Australian dollar , which is not part of the
dollar index, erased small early gains heading into the Chinese
retail sales and industrial production data, then sank further
after the release. It was last down 0.27% at $0.6682.
"The Aussie's upside looks to have been capped for some time
by investor concerns over China's outlook," said Westpac's
Callow.
"Today's data will set the Aussie back on its heels," he
added, predicting the currency could ease to around 0.6645, the
lower limit of its recent trading range.
The offshore Chinese yuan weakened towards a two-month low.
The dollar gained 0.14% to 6.9674 yuan, after touching 6.9749 on
Monday for the first time since March 10.
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(Reporting by Kevin Buckland
Editing by Shri Navaratnam and Neil Fullick)
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