25.05.2023 01:02 PM
Strong Dollar Hinders Market Growth, No Compromise on Debt Ceiling in Sight

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The lingering uncertainty and concerns associated with debt ceiling negotiations remain in limbo. Over the past three consecutive weeks, the U.S. dollar has continued to rise. In early May, the dollar index was trading at the level of 101, and currently, it is fixed at 104.04.

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Over the past two days, the dollar has risen by 0.43%. Throughout May, there has been a net increase of 3%.

Market participants are witnessing remarkably high yields on short-term Treasury bills. Bonds maturing between June 6 and June 15 currently yield 5.997%. This reflects concerns about whether officials will be able to reach a debt ceiling agreement in time to avoid a government default on its financial obligations.

The uncertainty surrounding the negotiations has led to a yield of 6.141% on one-year Treasury bills with an issuance date in June 2022 and a maturity date of June 15.

The minutes of the latest FOMC meeting held in May revealed that many Federal Reserve officials believe it would be prudent to pause rate hikes in the near future. However, there was no unanimous agreement among Fed officials on this matter. The minutes noted that some Federal Reserve officials emphasized that a rate cut is unlikely this year and further rate hikes cannot be completely ruled out.

The minutes also indicated that participants were focused on the bankruptcy of several banks in the United States and, consequently, on stress in the banking system, incorporating it into their forecasts.

However, there were also Federal Reserve officials who stated that, given the predictable development of the economy, further tightening of policies may not be necessary after the May meeting.

Even the more dovish stance of Federal Reserve members failed to support prices of precious metals and stocks.

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Apparently, market participants' expectations are based on the assumption that a resolution on the debt ceiling negotiations will be reached. This assumption, coupled with the high yields on short-term U.S. debt instruments and a strong dollar, keeps gold prices near the $1,960 per ounce lows.

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Irina Yanina,
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