By Ankur Banerjee and Alun John

SINGAPORE/LONDON (Reuters) – The greenback on Wednesday held simply shy of a two-month excessive as U.S. debt ceiling negotiations dragged on, whereas the pound firmed after which softened after stronger-than-expected British inflation knowledge.

Additionally in focus was the New Zealand greenback, which dived 1.8% after the nation’s central financial institution flagged an finish to fee hikes.

The which tracks the U.S. foreign money in opposition to six main friends was flat at 103.5, slightly below Tuesday’s 103.65, its highest since March.

The deadlock in Washington over debt ceiling negotiations has helped elevate the greenback, though it might result in a default and push the nation into recession, as buyers reckon that might spell worse bother for the worldwide financial system.

Treasury Secretary Janet Yellen has warned that the federal authorities might not manage to pay for to pay all its payments as quickly as June 1, elevating the danger of a harmful default.

Traders largely shunned riskier investments as one other spherical of talks between the White Home and the Republicans to lift the borrowing restrict ended on Tuesday with no signal of progress.

Stronger-than-expected financial knowledge and hawkish remarks from Federal Reserve coverage makers have additionally supported the greenback as markets reassess earlier bets for U.S. fee cuts later within the yr.

Markets are pricing in a 27% probability of a 25 foundation level hike in June, CME FedWatch instrument confirmed, after the Fed’s quarter level improve earlier this month.

Traders will get extra clues on coverage outlook from the minutes of the Fed’s Could assembly, due later within the day.

“We suspect the bottom case among the many management of the committee is that the tightening cycle might be over,” mentioned Kevin Cummins (NYSE:), chief economist at NatWest Markets.

Nonetheless, “current rhetoric from a number of officers appear excited by further hike(s), and this sentiment could properly have been mirrored within the tone of the minutes.”

In Europe the euro was 0.17% firmer at $1.0786 and the pound was a contact softer at $1.24105, having earlier risen as a lot as 0.44% to $1.247 in a knee jerk response after British inflation slowed by a lot lower than markets had anticipated, driving expectations of additional fee hikes from the Financial institution of England.

“There could be no sugar-coating of this knowledge and it’s a horrible inflation print that actually units the UK aside from different main developed economies in having a extra severe inflation drawback,” mentioned MUFG analysts in a observe to purchasers.

They mentioned the British foreign money ought to be supported by increased charges trajectory however the there’s a probability that the size of British inflation divergence undermines coverage credibility and forces fee hikes weakening development and undermining the pound’s efficiency.

Earlier within the day, the Reserve Financial institution of New Zealand raised rates of interest by 25 foundation factors, as anticipated, to the very best in additional than 14 years at 5.5% however its coverage assertion forecast that fee would prevail till June, 2024 – unchanged from the sooner forecast.

“The RBNZ was surprisingly dovish in its messages and forecasts,” mentioned Carol Kong, foreign money strategist at Commonwealth Financial institution of Australia (OTC:) (CBA). “In distinction to market expectations, the RBNZ saved its projected money fee peak at 5.50% and signalled its tightening cycle is over.”

The fell to a close to three week low and was final down 1.7% at $0.6140. The Australian greenback eased 0.5% to $0.6578.

Elsewhere, the yen was regular at 138.63 per greenback, having touched 138.91 in a single day, its softest in six months.