By Samuel Indyk

LONDON (Reuters) – The U.S. dollar hit a seven-week peak on Thursday after President Joe Biden and top U.S. congressional Republican Kevin McCarthy worked towards avoiding a damaging debt default, while investors scaled back Federal Reserve easing expectations.

Biden and McCarthy on Wednesday underscored their determination to strike a deal soon to raise the government’s $31.4 trillion debt ceiling, having agreed a day earlier to negotiate directly after a months-long standoff.

“In the short-term, the debt ceiling is win-win for the dollar,” said Viraj Patel, global macro strategist at Vanda (NASDAQ:) Research.

“If it gets worse, you’re going to see a global hard landing and you will want to be owning dollars. If it gets resolved, people shift their expectations for the Fed and we could see another hike,” he added.

Traders are pricing in around a 20% chance that the Federal Reserve raises its interest rate at its June meeting. Around a month ago, markets were pricing in around a 20% chance of a cut.

The rate traders have priced for the Fed’s December meeting stands at 4.525%, implying around 55 basis points of easing by year-end, down around 5 basis points from the day before.

The firmed 0.3% to 103.17, its highest level since March 27. It was last at 103.10.

The euro slipped as much as 0.3% to $1.0805, its lowest level in six weeks, while sterling was just above Wednesday’s three-week low of $1.2422.

The dollar also rose to a five-month high of 137.935 yen, having risen for six straight trading sessions, its longest such streak since October.

“Dollar/yen continues to be the market’s favourite pair of risk sentiment, so on the back of some positive developments on the debt ceiling negotiations, we saw dollar/yen unwind some of the losses recently,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:) (CBA).

Action in Asia was partly led by the dollar, after data on Thursday showed that Australia’s employment unexpectedly dipped in April following two months of outsized gains. The jobless rate also ticked up in a sign the red-hot labour market might be cooling.

The Aussie slipped about 0.4% after the data release and was last 0.3% lower at $0.6640, with expectations for further tightening from the Reserve Bank of Australia dampened.

“Today’s employment figures in Australia may complicate any plans to hike again,” said Francesco Pesole, FX strategist at ING.

“Still, we must remember there is close to nothing priced in terms of RBA tightening, so the room for a dovish re-pricing to hit AUD is limited.”

The slipped 0.1% to $0.6240 after New Zealand announced a worse-than-forecast budget deficit as a slowing economy and a lower tax take hit its coffers, leaving the Labour government walking a tightrope as its spending plan is expected to fan inflationary pressures.

The slumped to its lowest level against the dollar since December, having weakened past the key 7 per dollar level on Wednesday for the first time in five months, amid geopolitical tensions and more signs of China’s post-COVID recovery losing steam.