(Reuters) – The dollar rose to a two-week high against major currencies on Thursday as optimism grew that lawmakers in Washington might reach a deal to avert a potential U.S. debt default.
U.S. House of Representatives Republicans are considering signing on to a short-term increase in the government’s borrowing authority to buy time for negotiations on broader policy measures, according to a Republican leadership aide.
The dollar had come under pressure and U.S. short-term borrowing costs had jumped early this week as a government shutdown as a result of budget disagreements dragged on and as fears intensified whether Congress will raise the debt ceiling by the October 17 deadline.
“The market has frontloaded the impact of nearing the debt ceiling limit relative to the 2011 episode,” said Jens Nordvig, global head of foreign exchange research at Nomura Securities in New York. He said in 2011, such stress was felt only immediately ahead of a deadline.
“This front-loading is opening up the possibility of two-way risk even as we approach the October 17 deadline. This is the reason markets, including money markets, are rallying today, on greater hope for a resolution.”
The dollar index .DXY, which measures the greenback against a basket of six major currencies, rose 0.2 percent to 80.550, extending its recovery from an eight-month low of 79.627 hit last Thursday.
A rise in U.S. 10-year Treasury yields and minutes from the Federal Reserve’s September meeting suggesting that most board members supported tapering bond purchases later this year also boosted the dollar.
“There have been some positive developments regarding the debt ceiling and while they may be short-term measures, they offer some relief to the dollar,” said Neil Mellor, currency strategist at Bank of New York Mellon.
“The Fed minutes are also talking about tapering later this year, all of which is nudging markets to cover positions before the weekend.”
The dollar rallied 0.8 percent to 98.15 yen, up from a two-month low of 96.55 yen hit on Tuesday. Traders said the dollar rebounded after finding strong support at its 200-day moving average, currently at 96.82.
The euro slipped 0.1 percent to $1.3508.
The dollar briefly pared its gains versus the yen and hit a session low versus the euro after data showed the number of Americans filing new claims for unemployment benefits hit a six-month high last week.
The euro slipped 0.1 percent to $1.3512.
Despite signs of rapprochement in Washington, the dollar could still be vulnerable to concerns about a debt default. Short-term U.S. government bill yields were at the highest level since the 2008 financial crisis, reflecting investor anxiety.
“I would not be surprised to see some take profit in the dollar after the recent run. The situation has not really changed, and risk fear is mounting and the VIX is still just below 20 percent,” said Francesco Scotto, portfolio manager at RTFX Fund Management Ltd.
Wall Street’s favorite anxiety index, the VIX index .VIX closed on Wednesday at 19.60, after rising to 21.34 at one point. A level above 20 is generally associated with increasing concern about the near-term direction of the market.
Banks and money market funds are beginning to shun some Treasuries normally used as collateral in the $5 trillion repurchase agreement market.
Many investors are now looking to U.S. Treasury Secretary Jack Lew’s testimony before the Senate Finance Committee later on Thursday on his latest estimate on the Treasury’s funding positions, as well as possible contingency plans.
Lew has said the Treasury will run out of additional borrowing authority on October 17.
