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European Stocks, Dollar Rise on Optimism of U.S. Debt Deal

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Shivani Chauhan
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European shares opened higher and the U.S. dollar climbed to a seven-week high as traders expressed confidence that U.S. politicians would reach a deal to avert a debt default. The positive market sentiment continued in Asian trading, with Japan's Nikkei reaching a new 20-month high. President Joe Biden and top U.S. congressional Republican Kevin McCarthy's determination to reach a deal soon to raise the government's debt ceiling fueled optimism.

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Stock markets around the world responded positively to the news. At 0833 GMT, the MSCI world equity index was up 0.2%, while Europe's STOXX 600 and London's FTSE 100 rose by 0.6% and 0.7%, respectively. Germany's DAX climbed to its highest level in over a year. Traders drew confidence from Biden's decision to cut short his trip to Asia and return to Washington, as well as McCarthy's statement that a deal this week was "doable."

Debt Default Fears Subside, Markets Respond Positively

Kiran Ganesh, a multi-asset strategist at UBS, emphasized that the possibility of a debt default is a low-probability but high-impact event. The likelihood of a default seemed to decrease further, relieving markets of a potential tail risk. Avoiding default or delayed payments is crucial, as such an event could potentially push the U.S. into a recession.

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Dollar Strengthens, Yuan Weakens, and Inflation Concerns Linger

The U.S. dollar index rose 0.2% to around 103.09, reaching its strongest level against the Japanese yen since December. The dollar's recent strength can be attributed to its appeal as a safe haven and concerns that persistent inflation might prompt the U.S. Federal Reserve to raise interest rates further. In contrast, China's yuan weakened against the dollar, reaching its lowest point since December due to signs of a slowing post-COVID economic recovery.

Economic Data and Central Banks' Actions

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Later in the session, U.S. initial jobless claims data were due for release, with recent economic data raising expectations that the Federal Reserve may keep interest rates higher for a longer period. Some investors even speculated that another rate hike in June might not be off the table. However, UBS's Ganesh believed that the Fed would likely pause for the next few months to observe the trajectory of inflation.

(Read Also: Belgium approves €92 million aid package for Ukraine, half for military aid)

The European Central Bank's vice president, Luis de Guindos, stated that the bank would need to continue raising rates in the eurozone to combat inflation. Optimism surrounding the U.S. avoiding a debt default led to higher eurozone government bond yields, while the U.S. 10-year yield remained relatively stable.

Oil prices experienced a slight decline, with Brent crude futures down 0.6% and U.S. West Texas Intermediate crude down 0.6%. Meanwhile, Turkey's lira neared an all-time low following the inconclusive presidential election, in which incumbent Tayyip Erdogan, known for his unorthodox economic policies, took the lead. A runoff is scheduled for May 28.

(Read Also: Europe Faces Medicines Shortage Crisis: Lithuanian Health Minister Urges EU to Establish Collective Medication Stocks)

inflation European Stocks EuropeanShares DollarStrength JoblessClaims Debt Deal
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