Safe-haven dollar climbs to 6-week high, US debt risks in focus

It rose 0.5% against the yen to a two-week peak of 137.17 and 0.15% against sterling to $1.2469, after hitting its highest versus the British currency since April 26.

"A crushing blow to the world's number one economy can only have negative shockwaves to the global economy, and reduce risk appetite, which would thus become a safe-haven event," Rabobank strategist Jane Foley said.

Expectations for near-term U.S. interest rate cuts were dampened by a solid increase in April consumer spending, and by comments from Fed officials.

Chicago Fed President Austan Goolsbee said it was "far too premature to be talking about rate cuts", and Cleveland Fed President Loretta Mester said rates were not yet at a point where the central bank could hold steady, given stubborn inflation.

Interest rate futures pricing implies no chance of a rate cut in June, down from about a 17% chance seen a month ago.

"We expect some modest further increases in the dollar as markets continue to take out pricing for rate cuts," said Commonwealth Bank of Australia strategist Joe Capurso. "A rate hike is possible this year, though the hurdle is high."

The euro fell to a six-week low against the dollar, down 0.3% at $1.0831.

Euro zone inflation accelerated last month, Eurostat said on Wednesday, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations sharing the euro.

Turkey's lira, which has been under pressure since election results leave open the possibility of President Tayyip Erdogan extending his time in office – and his unorthodox economic policies – hit a 10-week low of 19.75 per dollar.

The Thai baht, which had initially climbed on strong election results from progressive parties, slipped 0.7% as politicians enter what could be a protracted period of dealmaking until a government is formed. [EMRG/FRX]