Dollar gains on resilient U.S. economy, flight to safety

By Herbert Lash

NEW YORK (Reuters) -The dollar hit a fresh two-month high against a basket of peers on Wednesday, bolstered by recent signs of a resilient U.S. economy, while unease over U.S. debt ceiling talks kept investors moving to safe havens.

The dollar is not seen posing an immediate risk, unlike certain Treasury securities, even though the debt ceiling impasse in Washington could lead to a default and push the U.S. economy into recession, analysts said.

Market expectations that the Federal Reserve would soon start to cut interest rates have ebbed as U.S. economic data has shown resiliency and given the dollar an edge, said Joe Manimbo, senior market analyst at Convera in Washington.

"There has been the view that the dollar could lose its yield advantage if the Fed cuts rates as much as the market had recently expected, and if Europe continues to raise rates," he said.

"Now there's been somewhat of an about-face with respect to the outlook on global interest rates."

Market bets that the Fed will raise rates at its next meeting in June rose slightly after minutes from its policy-setting meeting in early May were released.

Fed officials "generally agreed" last month that the need for further rate increases "had become less certain," but others cautioned the U.S. central bank needed to keep its options open given the risks of persistent inflation.

Federal funds futures show a 35.3% probability that the Fed raises rates when a two-day policy meeting ends on June 14, according to CME Group's (NASDAQ:CME) FedWatch tool.

The dollar index, which tracks the U.S. currency against six major peers, earlier hit 103.91, its highest since March 20. The index last rose 0.319% at 103.86.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said he doubts the debt ceiling negotiations have been a big factor in the foreign exchange market.

"The U.S. dollar has been rallying more or less for three weeks helped by stronger-than-expected data and rising U.S. interest rates," he said.

Economic data could continue to support the dollar, as the Atlanta Federal Reserve Bank projects the U.S. economy is growing at a 2.9% clip in the second quarter, Chandler said.

The pound dropped to a five-week low against the dollar of $1.2358 and was last down 0.42%, after data showed British inflation slowed by much less than markets had been expecting.

The British currency lost ground against the euro too, which was last down 0.26% at 1.1495.

Core eurozone services inflation reported on Tuesday remained elevated, hurting Sweden's crown, as the European Central Bank is poised to raise interest rates in June and July.

The Swedish currency hit 11.544 crowns per euro, its weakest against the common currency since March 2009.

New Zealand's dollar slipped after the central bank signaled it was done tightening after raising rates by 25 basis points to the highest in more than 14 years.

The dollar strengthened 0.99% against the crown, while the New Zealand dollar slid 2.3% against the U.S. currency to 0.61040.

Higher inflation, leading to higher-for-longer Bank of England rates, had supported the pound in recent months but that relationship is now starting to reverse.

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Currency bid prices at 3:51 p.m. (1951 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 103.8600 103.5400 +0.33% 0.358% +103.9100 +103.3400

Euro/Dollar $1.0752 $1.0771 -0.17% +0.35% +$1.0801 +$1.0748

Dollar/Yen 139.2650 138.5950 +0.50% +6.24% +139.3800 +138.2350

Euro/Yen 149.73 149.25 +0.32% +6.72% +149.9200 +148.8500

Dollar/Swiss 0.9049 0.9016 +0.36% -2.14% +0.9066 +0.9005

Sterling/Dollar $1.2361 $1.2416 -0.42% +2.23% +$1.2469 +$1.2358

Dollar/Canadian 1.3598 1.3503 +0.70% +0.36% +1.3605 +1.3497

Aussie/Dollar $0.6538 $0.6611 -1.10% -4.09% +$0.6615 +$0.6530

Euro/Swiss 0.9727 0.9706 +0.22% -1.70% +0.9751 +0.9705

Euro/Sterling 0.8696 0.8676 +0.23% -1.67% +0.8710 +0.8650

NZ $0.6100 $0.6248 -2.30% -3.87% +$0.6256 +$0.6094

Dollar/Dollar

Dollar/Norway 10.9640 10.9450 +0.21% +11.76% +11.0010 +10.9370

Euro/Norway 11.7866 11.7949 -0.07% +12.32% +11.8480 +11.7743

Dollar/Sweden 10.7192 10.6145 +0.76% +2.99% +10.7309 +10.6023

Euro/Sweden 11.5266 11.4392 +0.76% +3.38% +11.5444 +11.4354