Dollar strengthens on hopes of debt-ceiling deal

The dollar has gained ground against the Japanese yen for the third day in a row, after Republicans offered a temporary increase in the debt-ceiling.

Jack Lew, the US Treasury Secretary, said today that uncertainty over whether the US would raise its debt limit was ‘beginning to stress the financial markets’ and warned against leaving a deal to the last minute as such a strategy ‘could be very dangerous.’

Almost as if on cue, House Speaker John Boehner said that Republicans were willing to offer a temporary increase to the debt ceiling in return for talks with the President on spending issues. The proposal is thought to push back the debt limit by six weeks. Leading Republicans from the House of Representatives are due to meet President Obama at the White House later today.

While this still leaves plenty of question marks over how far away we are from legislation being passed, it does mark a key twist in the saga, with Republicans finally backing away from their previously intransigent stance.

The financial markets have latched on to this as a very positive sign that makes the avoidance of a US default look probable and we have had a consequent stock market rally and a bounce in the dollar against many of its peers, particularly the Japanese yen.

The return of optimism to the market is bad news for the safe-haven yen. By mid-afternoon in New York, USD/JPY had climbed 0.88% to 98.20 and the dollar index, a gauge of the dollar’s strength against a basket of six currencies, was up 0.08%.

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