Dollar nudges lower as US debt ceiling deal dents safe-haven appeal

LONDON, May 29 (Reuters) – The dollar nudged down on Monday, pulling back from six-month peaks against the yen as a US debt ceiling deal lifted risk appetite in world markets and dented the greenback’s safe-haven appeal.

US President Joe Biden on Sunday finalized a budget agreement with House Speaker Kevin McCarthy to suspend the USD 31.4 trillion debt ceiling until Jan. 1, 2025, and said the deal was ready to move to Congress for a vote.

Having briefly touched a six-month high of 140.91 yen during Asia trade, the dollar drifted lower and was last down almost a third of a percent at 140.17 yen.

The dollar index, which measures the US unit’s value against a basket of other major currencies, was also a touch softer around 104.23 but not far from last week’s two-month peaks.

The pull-back in the safe-haven dollar came as world stocks rallied on the positive news from Washington, although trade was generally subdued with parts of Europe, including Britain, on holiday along with the United States.

“An initial risk-on reaction is likely as the cloud of US default has retreated,” said Charu Chanana, a market strategist at Saxo Markets in Singapore.

“But focus will quickly turn to the fact that getting the deal is only a step in the process and an agreement from both the House and Senate by June 5 is still a big ask.”

The agreement would suspend the debt limit through Jan. 1, 2025, and cap spending in the 2024 and 2025 budgets.

SPAIN ELECTION

In Europe, the euro slipped 0.2% to USD 1.0709, showing little immediate reaction to news of a snap election in Spain.

Spanish Prime Minister Pedro Sanchez said on Monday polling would take place on July 23 after his left-wing coalition government suffered heavy losses in regional ballots on Sunday.

Upbeat world sentiment pushed the risk-sensitive Australian and New Zealand dollars off last week’s six-month lows.

The Aussie rose 0.35% to USD 0.6541, while the kiwi edged 0.2% higher to USD 0.6058.

“We’ve got a risk-positive response so far to the debt deal news,” said Ray Attrill, head of FX strategy at National Australia Bank.

“Obviously there’s still the need to get this debt deal over the line, but I think markets are happy to travel on the presumption that it will get done before the new X-date.”

US Treasury Secretary Janet Yellen on Friday said the government would default if Congress did not increase the USD 31.4 trillion debt ceiling by June 5, having previously said a default could happen as early as June 1.

Talk that the US rate hiking cycle may not be over as soon as hoped given signs of economic strength have bolstered the dollar and could support the currency even as US debt ceiling worries abate.

The dollar was on course for a monthly gain of about 3% against the yen. The dollar index has gained 2.5% in May.

Data on Friday showed US consumer spending increased more than expected in April and inflation picked up, adding to signs of a still-resilient economy.

Money markets price in a roughly 62% chance that the Federal Reserve will raise rates by 25 basis points in June, versus a roughly 26% chance a week ago.

Elsewhere, the Turkish lira touched a record low at 20.10 per dollar after President Tayyip Erdogan secured victory in the country’s presidential election on Sunday, extending his increasingly authoritarian rule into a third decade.

Bitcoin, meanwhile, slipped 0.5% to USD 27,932, down from a three-week high hit earlier on.

(Reporting by Dhara Ranasinghe in London and Rae Wee in Singapore; Editing by Emelia Sithole-Matarise, Andrew Heavens and Mike Harrison)

In the Market: Amid the calm, the Fed brews the next storm

May 29 (Reuters) – Having navigated the financial crisis of 2008, Neel Kashkari worries about systemic risks. But now, as a US monetary policymaker, he worries even more about inflation.

“I think if I had to err, I would err on being a little bit too aggressive in terms of bringing inflation down,” the president of the Federal Reserve Bank of Minneapolis told Reuters last week.

Surprised by the persistence of inflation in the face of the fastest rate hike cycle since the 1980s, Kashkari and some other Fed officials have turned up the heat again in recent days, with a hawkish outlook on interest rates.

In doing so, they may also be inadvertently setting the stage for the next market crisis and Fed intervention, in turn, undercutting the bank’s policy tightening to fight inflation.

So the Fed’s attempt to guide the economy to a so-called “soft landing” while preserving financial stability is instead increasing the odds that it will either be a crash landing or a longer, more turbulent glide path to the ground.

“They’re a little bit in a situation where they’re damned if they do, and damned if they don’t,” said Raghuram Rajan, the former Indian central bank governor and finance professor at Chicago Booth. “If they do raise short-term policy rates, clearly, at some point, something more breaks.”

The probability of a soft landing? “Very small,” Rajan said.

The Fed declined to comment.

Over the past year rapidly rising interest rates after more than a decade of ultra-cheap money have exposed risky bets and bad business models.

Stress has flared up in different parts of the global financial system, from the bursting of the crypto bubble a year ago to turbulence in the US regional banking sector in March.

While it is not clear where the next storm would hit markets, the potential sources of vulnerability are many, from commercial real estate to money market funds.

THREADING A NEEDLE

Markets have settled down since the worst of the banking upheaval receded. Signs that the economy remains resilient also have more investors betting the Fed could bring inflation down without causing too much economic pain or instability.

Earlier this month, Chairman Jay Powell said the Fed’s monetary policy and financial stability tools were “working well together,” allowing it to support banks and pursue price stability.

But several people in the market believe not only is the regional banking sector still under stress, multiple other risks to financial stability also remain.

Tighter monetary policy could well cause them to blow up or worsen the impact of other shocks, such as debt ceiling negotiations. Those flare-ups could force more interventions, partially offsetting tighter policy.

“The Fed has no desire to conduct monetary policy through financial crises,” said Wendy Edelberg, director of The Hamilton Project at the Brookings Institution. “And so they have to thread a needle if they see their actions creating crises. Then they need to mitigate that.”

MANY RISKS

In the aftermath of the run on Silicon Valley Bank (SVB) in March, the Fed had to step in with tens of billions of dollars of emergency support to the banking system. Some argue that in effect countered its moves to tighten policy.

“The market is confused as to whether the Fed is tightening or easing,” said James Tabacchi, chief executive of broker-dealer South Street Securities. “We try to follow what they’re going to do. And right now, the market doesn’t know which Fed to follow.”

Systemic shocks could come from both known and unexpected avenues. In its most recent financial stability report earlier this month, the Fed listed several areas of concern, including life insurance and some types of bond and loan funds.

The Minneapolis Fed’s Kashkari pointed to private markets, where although many experts expect risk to be limited, lack of transparency means that officials do not fully understand the extent of debt-fueled bets that have been taken. It is also not always clear how financial institutions are interconnected.

“There’s a lot of complexity out there that we don’t have great visibility into,” Kashkari said. “That unfortunately may not get revealed until there is a real problem.”

(Reporting by Paritosh Bansal; Editing by Anna Driver)

Relief rally eyed on US debt ceiling deal

Optimism and relief are likely to be the dominant emotions for investors on Monday, giving markets in Asia a lift as lawmakers in Washington reached a tentative agreement on the U.S. debt ceiling, thus removing the risk of a catastrophic default.

Trading and market liquidity in Asia will be lighter than usual, however, with U.S. and UK markets closed for holidays, opening up the potential for outsized market moves.

If so, they are likely to be outsized gains, certainly across risk assets – Wall Street rallied strongly on Friday, particularly the Nasdaq and mega tech stocks, and the news from Washington over the weekend will only be seen as positive.

After weeks of tough negotiations, Republicans and Democrats reached a tentative agreement to suspend the USD 31.4 trillion debt ceiling, which now must get through the Republican-controlled House of Representatives and Democratic-led Senate before June 5 to avoid a crippling first-ever default.

Both sides are confident it will pass.

It could be a double-edged sword for Asian markets, if not on Monday than in the days and weeks ahead. A debt limit deal gives the Federal Reserve more room to tighten policy, which could push up US bond yields and strengthen the dollar – not usually a good mix for emerging markets.

The dollar is already on a tear, reaching a two-month high on an index basis last week and six-month peaks against the Japanese yen and Chinese yuan above 140 yen and 7.00 yuan, respectively. Japanese and Chinese policymakers are facing different challenges though.

Inflation in Japan is high and sticky, and the Bank of Japan is under pressure to tweak or abandon its ultra-loose ‘yield curve control’ monetary policy. Tokyo may quietly prefer the yen to strengthen from here.

Beijing, on the other hand, might like the yuan to fall further. The economy’s post-pandemic lockdown recovery has been weaker than expected, to put it mildly, and inflationary pressures are evaporating. Barclays economists predict 10-20 basis points of policy rate cuts and 25-50 bps of reserve requirement ratio cuts over the next six to nine months.

Japanese equity markets open on Monday near the 33-year highs reached last week, while Chinese stocks are languishing near six-month lows. So is the Hang Seng tech index, struggling under the cloud of rising U.S.-Sino trade tensions rather than benefiting from the US tech boom.

Perhaps that changes on Monday, if only briefly.

The Asian economic data and events calendar is light on Monday but fills up later in the week, with the focus turning to Japanese unemployment on Tuesday, India’s first quarter GDP and Thailand’s interest rate decision on Wednesday, and South Korea’s Q1 GDP on Friday.

Purchasing managers index reports for several countries are scheduled for release too, with China’s May data on Tuesday and Wednesday likely to be the biggest market-movers.

(Jamie McGeever)

Oil ticks up as markets weigh US debt deal, rate hike possibility

HOUSTON, May 29 (Reuters) – Oil prices edged higher in choppy trading on Monday, as markets weighed a tentative US debt ceiling deal that would avert a default by the world’s top oil consumer against further Federal Reserve interest rate hikes that could curb energy demand.

Brent crude futures settled up 12 cents, or 0.2%, to USD 77.07 a barrel, while US West Texas Intermediate crude CLc1 was up 25 cents, or 0.3%,at USD 72.92 a barrel.

Both benchmarks flip-flopped between positive and negative territory. Trade was subdued on Monday because of UK and US public holidays.

“The euphoria of the debt deal is wearing off as concern mounts for another rate hike by the Fed in June,” brokerage Liquidity Energy LLC wrote in a note.

US President Joe Biden and House of Representatives Speaker Kevin McCarthy over the weekend forged an agreement to suspend the USD 31.4 trillion debt ceiling and cap government spending for the next two years. Both leaders expressed confidence that both Democratic and Republican lawmakers will support the deal.

Still, analysts saw any boost in oil prices from it as short-lived.

Markets are now pricing in a roughly 50-50 chance that the Fed raises rates by another 25 basis points at its June 13-14 meeting, up from the 8.3% chance predicted a month ago, according to CME’s FedWatch Tool.

At its last policy meeting on May 2-3, the Federal Reserve signaled it was open to pausing its most aggressive rate-hiking cycle since the early 1980s in June.

“Higher US rates are a headwind for crude oil demand,” IG Sydney-based analyst Tony Sycamore said.

The dollar also nudged down on Monday as the debt ceiling deal lifted risk appetite in world markets and dented the greenback’s safe-haven appeal. A lower greenback helps demand for oil, which is priced in dollars.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, known as OPEC+, are due to meet on June 4.

Saudi Energy Minister Abdulaziz bin Salman warned short-sellers betting that oil prices will fall to “watch out,” in a possible signal that OPEC+ may further cut output.

However, comments from Russian oil officials and sources, including Deputy Prime Minister Alexander Novak, indicate the world’s third-largest oil producer is leaning toward leaving output unchanged.

“Traders have been left a little confused as to what we can expect,” said Craig Erlam, senior markets analyst at OANDA.

“It may be that Saudi Arabia wants to keep traders on their toes, but to make these comments and not follow through could be perceived as weak and see prices drift lower again,” Erlam said.

(Additional reporting by Noah Browning in London, Florence Tan in Singapore and Mohi Narayan in New Delhi; Editing by David Holmes, Leslie Adler and John Stonestreet)

Asian shares, US futures rise on debt ceiling deal

SYDNEY, May 29 (Reuters) – Asian shares and US stock futures rose on Monday, buoyed by a weekend deal by US President Joe Biden and congressional Republican Kevin McCarthy to suspend the government’s debt ceiling, ending a months-long stalemate and angst for investors.

After weeks of negotiations, McCarthy and Biden forged an agreement late on Saturday to avert an economically destabilizing default to suspend the USD 31.4 trillion debt ceiling until 2025. The deal will now have to pass through the narrowly divided Congress.

The positive news lifted S&P 500 futures ESc1 0.4% in early trade while Nasdaq futures NQc1 firmed 0.6%. Nikkei surged 1.9% to a fresh 33-year high and Australia’s resources-heavy shares gained 0.6%.

MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3%.

“Asian markets should start the week on the front foot, but for the US equity markets… futures have opened stronger this morning, but we need to see the deal being passed for the next leg higher,” said Tony Sycamore, market analyst at IG.

“Yes, we will get the relief rally in the short-term but then we have to start thinking about the June FOMC meeting, about inflation being stickier than expected, and the money being drained out of the (share) markets.”

Cash US Treasuries were untraded in Asia on Monday, owing to the Memorial Day holiday, while futures were broadly steady. Ten-year futures’ TNc1 implied yield was 3.84%.

On Friday, the Federal Reserve’s preferred gauge of inflation – the personal consumption expenditures (PCE) price index – came in stronger than expected, with markets now leaning towards a quarter-point hike from the Fed next month and seeing rates staying there for the rest of the year.

In Turkey, the lira hovered at 20.04 against the dollar, just a touch above its record low of 20.06 hit on Friday, after President Tayyip Erdogan secured victory in the country’s presidential election, extending his increasingly authoritarian rule into a third decade.

Elsewhere in the currency markets, the dollar index – a measure of the greenback against its major peers – was solidly placed at 104.26, close to a two-month high hit on Friday.

The yen slumped to a fresh six-month low of 140.89 per dollar in early trade, the euro nursed losses around a two-month trough of USD 1.0721 and the Aussie hovered at USD 0.6527, just a touch above a six-month low hit on Friday.

Oil prices rose early Monday. Brent crude futures climbed 39 cents, or 0.5%, to USD 77.34 a barrel, while US West Texas Intermediate crude was at USD 73.12 a barrel, up 45 cents, or 0.6%.

Gold prices were 0.1% lower at USD 1,943.69 per ounce.

(Editing by Shri Navaratnam)

Oil climbs after US leaders strike provisional debt deal

SINGAPORE, May 29 (Reuters) – Oil prices rose in early Asian trade on Monday after US leaders reached a tentative debt ceiling deal, possibly averting a default in the world’s largest economy and oil consumer.

Brent crude futures climbed 39 cents, or 0.5%, to USD 77.34 a barrel by 2317 GMT, while US West Texas Intermediate crude was at USD 73.12 a barrel, up 45 cents, or 0.6%.

US President Joe Biden and House Speaker Kevin McCarthy on Saturday reached an agreement in principle to suspend the USD 31.4 trillion debt ceiling. Both leaders expressed confidence on Sunday that members of the Democratic and Republican parties will vote to support the deal.

However, relief for global financial markets could be short-lived as once the deal is approved, the US Treasury is expected to issue bonds that will further tighten liquidity and make funding more expensive for companies already reeling from high interest rates.

Last week, Brent and WTI notched a second consecutive weekly gain of more than 1% on the progress of the US debt ceiling talks and after the Saudi energy minister warned short-sellers betting oil prices will fall to “watch out” for pain.

Some investors took the warning as a signal that OPEC+, the Organization of Petroleum Exporting Countries and allies including Russia, could consider further output cuts at a meeting on June 4.

However, Russian Deputy Prime Minister Alexander Novak said last week he expected no new steps from OPEC+ as a decision on voluntary production cuts was made just a month back.

US energy firms cut rigs for a fourth week in a row, with oil rigs down by five to 570 last week to their lowest since May 2022, energy services firm Baker Hughes Co BKR.O said in its weekly report on Friday.

Investors are watching for China’s manufacturing and services data this week as well as US nonfarm payroll data on Friday for signals on economic growth and oil demand.

(Reporting by Florence Tan; Editing by Sonali Paul)

Debt deal could boost unloved corners of US stock market, though risks loom

May 28 (Reuters) – Global investors are gaming out how a tentative deal to raise the United States debt ceiling could ripple through markets, as lawmakers strive to pass the agreement through Congress before a June 5 deadline.

A deal to lift the USD 31.4 trillion debt limit announced by the White House and House Republicans late Saturday would avert a catastrophic US default and boost overall appetite for risk while also buoying some of the sectors that have been left behind in this year’s tech-led rally, such as cyclical stocks and small caps, investors said.

E-mini futures for the S&P 500 were up 0.5% in Sunday evening futures trading.

But some investors are wary that proposed spending cuts could weigh on US growth. At the same time, a negotiation process that barely avoided a default threatens to undermine the US standing with credit ratings agencies.

“While the White House’s debt ceiling agreement is great news, the US government still has a cash flow problem and time is of the essence to finalize the agreements,” said Bob Stark, global head of market strategy at treasury and financial management firm Kyriba. “The debt ceiling agreement is only the first step in saving the government from the brink of illiquidity.”

The deal suspends the debt ceiling until January 2025 in exchange for caps on spending and cuts in government programs. Narrow margins in the House and Senate mean that moderates from both sides will have to support the bill.

US Treasury Secretary Janet Yellen on Friday set a deadline for raising the federal debt limit, saying the government would default if Congress does not increase the debt ceiling by June 5.

NEAR MISS?

Since the USD 24.3 trillion US Treasury market underpins the global financial system, a default – or even a close call – could trigger massive volatility across global markets.

The uncertainty periodically weighed on stock markets over the last week, although most investors and analysts said they had expected an 11th-hour agreement. Optimism that a debt ceiling deal was near and hefty gains in AI-related stocks helped the S&P 500 close at its highest level since August 2022 on Friday. It is up 9.5% year to date.

Among the market sectors that stand to benefit from a deal are defense stocks, which have lagged during the negotiations, as well as cyclical sectors of the market and energy stocks, said Quincy Krosby, chief global strategist at LPL Financial.

“The hope is that the approval of this tentative deal will help underpin the broader market and not just the handful of big tech names that have kept the market well in positive territory,” she said.

Stuart Kaiser, head of equity trading strategy at Citi, said a deal could be a “modest positive” for equity markets at the index level but could provide a greater boost for sectors that have lagged this year, including shares of companies with weaker balance sheets and small-cap stocks.

But market participants are also wary of how proposed spending caps will impact specific sectors as well as the broader US economy.

“What investors will now focus on is the cost of the spending cuts to the health of the American economy,” Stark said. “How much impact will these spending cuts have on GDP and economic growth?”

Meanwhile, the brinkmanship in Washington could also prompt rating agencies to downgrade US debt. Ratings agency Fitch late Wednesday put the United States on credit watch for a possible downgrade while DBRS Morningstar on Thursday placed US credit ratings under review with “negative implications.”

S&P Global Ratings stripped the United States of its coveted top rating over a debt ceiling showdown in 2011, a few days after a last-minute agreement the agency at the time said did not stabilize “medium-term debt dynamics.”

The downgrade contributed to a decline in US stocks that saw the S&P 500 lose some 17% between late July and mid-August of 2011.

S&P Global Ratings, Fitch, and Moody’s did not immediately respond to Reuters requests for comment.

Investors are also bracing for potential volatility in US government bonds as the Treasury is expected to quickly refill its empty coffers with bond issuance once the debt ceiling is raised, potentially sucking out hundreds of billions of dollars of cash from the market.

“We will get the optimism that a deal is done and that a real crisis is averted, and the dreaded liquidity drain at the same time,” said Damien Boey, macro strategist at BarrenJoey in Sydney, Australia. “I think you will find that interest rate volatility will rise, and this will cause banks and non-AI growth stocks to be laggards.”

(Reporting by Laura Matthews, Chibuike Oguh, Tom Westbrook, Saqib Iqbal Ahmed, and David Randall; Editing by Ira Iosebashvili, Michelle Price, and Mark Porter)

Debt ceiling deal may shift investor focus to further Fed action

NEW YORK, May 26 (Reuters) – A last-minute deal to raise the US USD 31.4 trillion debt ceiling will likely shift Wall Street’s attention to other emerging risks, including further Federal Reserve interest rate hikes and an expected reduction in fiscal spending.

At its May 3 meeting, the Federal Reserve signaled it was open to pausing its most aggressive rate hiking cycle since the early 1980s at its meeting that ends June 13, leading investors to pile back into equities and other riskier assets.

The S&P 500 is up more than 9.4% for the year to date and now trades at nearly 19 times its forward earnings, at the high end of its historical range. Megacap technology and growth stocks, which benefit from lower interest rates, have led the market’s advance.

“There has been a pivot party in equities, which is this idea that Fed will pause and reverse course that has rewarded risk assets,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.

“We think that there’s limited upside from here.”

Since May 3, Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard have said that inflation does not appear to be cooling fast enough.

Unexpectedly strong economic data on Friday appeared to bolster their case, with underlying core inflation at 4.7%, up from 4.6% in March and well above the Fed’s 2% inflation goal.

Markets are now pricing in a roughly 50-50 chance that the Fed raises rates by another 25 basis points at its June 14 meeting, up from an 8.3% chance seen of an expected rate hike one month ago, according to CME’s FedWatch Tool.

A Congressional package raising the debt ceiling, meanwhile, is expected to cap spending on government programs.

That, combined with the possibility of higher interest rates to cool inflation, could help push the US economy into a recession despite ongoing strength in the labor market, said Tony Rodriguez, head of fixed income strategy at asset manager Nuveen.

“We expect to see a slowing economy because a number of what had been tailwinds are becoming headwinds.”

The US economy has remained unexpectedly resilient, given widespread expectations at the end of 2022 that it would be in recession by mid-year. Investors will be closely watching next Friday’s jobs report to gauge the ongoing strength of the labor market and the potential for consumer spending.

And overall, analysts are expecting the S&P 500 to reflect earnings growth of 1.2% in the third quarter and 9.2% in the fourth quarter, according to Refinitiv.

While those estimates may be boosting investor sentiment now, signs of economic strength may leave inflation higher than the Fed would like, prompting more rate hikes, said Josh Jamner, investment strategy analyst at ClearBridge Investments.

“It’s a pick your poison moment,” he said. “If we get a soft landing that puts stock multiples at risk due to the Fed raising rates, and if we get rate cuts it means that the economy has fallen into recession.”

The debt ceiling impasse had weighed on stocks in recent days, but for the most part, investors had been expecting Washington to reach a deal. That means a sustainable relief rally is unlikely in the equity market, said Roland.

At the same time, the equity market has only just begun to start pricing in more Fed hikes, she added.

Higher rates over the second half of 2023 will keep pressuring companies that issued debt during the pandemic era of ultra-low rates, and they will need to either pay it off or refinance it, said Bryant VanCronkhite, a senior portfolio manager at Allspring Investments.

Some USD 6.5 trillion issued in 2020 and 2021 will mature by 2025, according to S&P Global Ratings.

“The ongoing effects of monetary policy now are setting us up for this wall of debt that people aren’t talking about with enough vigor,” he said.

(Reporting by David Randall; editing by Michelle Price and Richard Chang)

Debt ceiling deal may shift investor focus to further Fed action

“We think that there’s limited upside from here.”

Since May 3, Dallas Federal Reserve Bank President Lorie Logan and St. Louis Fed President James Bullard have said that inflation does not appear to be cooling fast enough.

Unexpectedly strong economic data on Friday appeared to bolster their case, with underlying core inflation at 4.7%, up from 4.6% in March and well above the Fed’s 2% inflation goal.

A Congressional package raising the debt ceiling, meanwhile, is expected to cap spending on government programs.

“We expect to see a slowing economy because a number of what had been tailwinds are becoming headwinds.”

And overall, analysts are expecting the S&P 500 to reflect earnings growth of 1.2% in the third quarter and 9.2% in the fourth quarter, according to Refinitiv.

The debt ceiling impasse had weighed on stocks in recent days, but for the most part investors had been expecting Washington to reach a deal. That means a sustainable relief rally is unlikely in the equity market, said Roland.

At the same time, the equity market has only just begun to start pricing in more Fed hikes, she added.

Some USD 6.5 trillion issued in 2020 and 2021 will mature by 2025, according to S&P Global Ratings.

“The ongoing effects of monetary policy now are setting us up for this wall of debt that people aren’t talking about with enough vigor,” he said.

(Reporting by David Randall; editing by Michelle Price and Richard Chang)

Gold wobbles as sticky inflation drives up US rate hike bets

May 26 (Reuters) – Gold gave up some gains on Friday and was on course for a third straight weekly loss on the likelihood of a last-minute debt ceiling deal and as a hotter-than-expected US inflation gauge raised bets for rates to stay higher for longer.

Spot gold was up 0.1% at USD 1,943.12 per ounce by 1:40 p.m. EDT (1740 GMT), having risen as much as 0.9% in the session. US gold futures settled mostly flat at USD 1,944.30.

The White House and congressional Republicans aim to put the final touches on a deal to raise the debt ceiling for two years.

Gold hit a two-month low of USD 1,936.59 during Asian trading hours and is set to lose 1.7% for the week.

“Despite positive noises coming from D.C., a debt deal may still be difficult to get through before June 1,” said Tai Wong, a New York-based independent metals trader.

But short-term players expect a deal to be done and “have been selling behind inflation data that suggests a June hike is possible,” Wong added.

The personal consumption expenditures (PCE) price index, which the Federal Reserve tracks for its 2% inflation target, increased 4.4% in the 12 months through April after advancing 4.2% in March.

“The PCE number just kicked one of the legs out on the stool of the gold market … a softer number would have provided the tailwind behind gold,” said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Traders are now betting the Fed will deliver an 11th straight rate hike in June, which would erode the attraction of zero-interest-bearing gold.

Benchmark 10-year Treasury yields and the dollar index hovered near their highest levels since mid-March, both on track for their third straight weekly gains.

Spot silver rose 1.9% to USD 23.23 per ounce but was also on track for a third consecutive weekly dip.

Platinum gained 0.2% to USD 1,022.43, while palladium was up 0.6% to USD 1,425.61.

(Reporting by Deep Vakil and Seher Dareen in Bengaluru; Editing by Emelia Sithole-Matarise, Anil D’Silva and Mark Potter)

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