The dollar hit a one-month high against a basket of currencies on Tuesday, buoyed by signs US lawmakers could soon reach a deal to avert default. The dollar index rose 0.4 percent to 80.678, its highest since September 18. US Senate Majority Leader Harry Reid, a Democrat, said he and his Republican counterpart, Mitch McConnell, had made "tremendous progress" in talks, and suggested a deal could come as early as Tuesday.
The comments raised expectations of a deal before a Thursday deadline to raise the US debt ceiling. A source said the plan would end a partial government shutdown and cover the country's borrowing needs at least through mid-February. The dollar rose 0.8 percent to a one-month high against the safe-haven Swiss franc of 0.9178 francs. It hit a two-week high against the yen of 98.71 yen. "The overall theme is that things in the US are making some progress and that is an initial dollar positive," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"We will see the dollar holding up quite well in that environment." The dollar also rose against the euro, which failed to benefit from a survey showing a better than expected German analyst and investor sentiment. The euro fell 0.6 percent on the day to hit a two-week low of $1.3479. Analysts said negative impact of the shutdown on the economy would encourage the US Federal Reserve to further delay scaling back monetary stimulus, making the dollar's longer-term prospects less rosy.
"If we get some kind of temporary resolution in the US it will have a small positive short-term impact on the dollar. But in the medium term this is clearly dollar negative," said Richard Falkenhall, currency strategist at SEB. Morgan Stanley's Stannard said the prospect of US central bank asset purchases staying at current levels for longer could keep higher-yielding currencies like the Australian dollar well supported, potentially lifting it towards $0.9660. The Australian dollar hit a four-month high of $0.9548 against the greenback, helped by Reserve Bank of Australia minutes which showed no urgency to lower interest rates.
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