Dollar edges up as market looks to U.S. debt ceiling talks, inflation data

The dollar edged up against major currencies on Tuesday as traders awaited U.S. debt ceiling talks and new inflation data for a clearer picture of the outlook for the economy and U.S. interest rates.

Data on Tuesday - showing China's imports contracted sharply in April from a year earlier while exports grew more slowly than in March - had a limited impact on currencies, but contributed to risk-off moves broadly across markets.

Closely-watched U.S. inflation data due on Wednesday is likely to set the tone for markets, after stronger-than-expected jobs data last week.

Any Fed policy tweaks will have to be weighed against a backdrop of recent turmoil in the U.S. banking sector and a political impasse in Washington over resolving the country's debt ceiling and avoiding a default, analysts said.

"Overall, the data highlights that it is not yet a done deal that the Fed will not raise rates further although we agree with market pricing that there is a higher hurdle now especially with the upcoming US debt ceiling stand-off," currency analysts at MUFG said in a note.

The Federal Reserve's quarterly survey of bank loan officers on Monday showed that credit conditions for U.S. businesses and households continued to tighten at the start of the year.

The closely watched survey was among the first measures of sentiment in the banking sector since the recent run of bank failures, sparked by Silicon Valley Bank's collapse in March.

Against a basket of currencies, the U.S. dollar index DXY edged up 0.1% to 101.5, but remained near recent lows as traders eye a peak in U.S. interest rates. (=FEDWATCH)

The euro EURUSD dipped 0.2% to $1.09800.

The Japanese yen USDJPY rose 0.3% to 134.790 per dollar, aided by comments from Bank of Japan (BOJ) Governor Kazuo Ueda that the central bank may end its yield curve control policy and start shrinking its balance sheet.

Elsewhere, sterling GBPUSD was broadly flat and bought $1.26190, ahead of Thursday's central bank policy meeting.

The Bank of England looks set to raise interest rates to 4.5%, as it tries to fight the highest inflation rate in Western Europe.

Kenneth Broux, head of corporate research for FX and rates at Societe Generale, said sterling had been holding up better than the euro versus the dollar given the possibility of a hawkish tone from the BoE alongside the expected rate hike.

"EUR/GBP, keeps losing altitude after the break of the 200 (day moving average) last week," he said.