Dollar ascends to fresh 10-1/2-month peak; U.S. debt ceiling impact muted

© Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration

By Gertrude Chavez-Dreyfuss and Iain Withers

NEW YORK/LONDON (Reuters) -The dollar surged on Wednesday to a fresh 10-1/2-month peak against rival currencies, boosted by increased expectations for a reduction in the U.S. Federal Reserve's asset purchases by the end of the year and an interest rate hike, possibly in late 2022.

The greenback also fared well despite an impasse in Washington over the U.S. debt ceiling that threatened to plunge the government into a shutdown.

The world's largest reserve currency, seen as a safe haven bet at times of market stress, has strengthened in recent days as investors instead focus on fears of a global slowdown, a rise in energy prices and higher U.S. Treasury yields.

Traders are also concerned the Fed will start to withdraw policy support just as global growth slows.

"The Fed last week got on the more hawkish side, projecting more rate increases..and sounding more worried about persistently high inflation," said Erik Nelson, macro strategist, at Wells Fargo (NYSE:WFC) Securities in New York.

"To me, that's what helping the dollar stay well-bid here."

Nelson also sees a further 2% to 3% upside in the dollar index.

The dollar index - which measures the U.S. currency against a basket of six major currencies - rose for the fourth consecutive day, to 94.112, its highest since early November last year. It was last up 0.4% at 94.115.

The greenback was also unfazed, even as U.S. Senate Republicans on Tuesday blocked a bid by President Joe Biden's Democrats to head off a potentially crippling U.S. credit default, with federal funding due to expire on Thursday and borrowing authority on around Oct. 18.

"It's a sign perhaps of the confidence that people have in the U.S. that even as the U.S. government barrels toward a cliff like a car with a drunken driver who's being beaten up by his even more drunk passenger, the dollar can strengthen," said Marshall Gittler, head of investment research at BDSwiss, in a note.

The euro was among the currencies to lose ground, falling to a nearly 11-month low of $1.1630. It last traded down 0.5% at $1.1631.

The yen showed little reaction to the election of Fumio Kishida as leader of Japan's ruling Liberal Democratic Party that put him on course to become the country's next prime minister.

The yen, the currency most sensitive to U.S. yields as higher rates can attract flows from Japan, touched an 18-month low against a resurgent dollar. The dollar climbed to 111.68 yen, the highest since late March 2020. It was last little changed at 111.585 yen.

Currency traders are watching closely for clues as to when governments and central banks worldwide will reverse massive emergency support launched to fight the pandemic last year.

European Central Bank (ECB) President Christine Lagarde, Fed Chair Jerome Powell, Bank of England Governor Andrew Bailey and Bank of Japan Governor Haruhiko Kuroda are panelists at an ECB forum in Sintra, Portugal, at 1545 GMT.

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Currency bid prices at 10:10AM (1410 GMT)

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

Close Change

Previous

Session

Dollar index 94.1070 93.7060 +0.44% 4.585% +94.1200 +93.6710

Euro/Dollar $1.1630 $1.1684 -0.46% -4.81% +$1.1690 +$1.1630

Dollar/Yen 111.6300 111.5150 +0.10% +8.04% +111.680 +111.210

0 0

Euro/Yen 129.81 130.25 -0.34% +2.28% +130.470 +129.680

0 0

Dollar/Swiss 0.9315 0.9293 +0.24% +5.29% +0.9315 +0.9281

Sterling/Doll $1.3440 $1.3536 -0.71% -1.62% +$1.3554 +$1.3435

ar

Dollar/Canadi 1.2725 1.2686 +0.32% -0.06% +1.2730 +1.2670

an

Aussie/Dollar $0.7194 $0.7240 -0.64% -6.48% +$0.7264 +$0.7179

Euro/Swiss 1.0831 1.0855 -0.22% +0.22% +1.0862 +1.0822

Euro/Sterling 0.8652 0.8629 +0.27% -3.19% +0.8656 +0.8613

NZ $0.6887 $0.6960 -1.05% -4.09% +$0.6962 +$0.6887

Dollar/Dollar

Dollar/Norway 8.7390 8.6605 +0.80% +1.67% +8.7455 +8.6460

Euro/Norway 10.1630 10.1219 +0.41% -2.91% +10.1778 +10.0980

Dollar/Sweden 8.7669 8.7334 -0.08% +6.96% +8.7698 +8.7233

Euro/Sweden 10.1970 10.2055 -0.08% +1.20% +10.2086 +10.1816