SINGAPORE, May 19 Reuters The dollar held at around sixmonth highs against the yen and sevenweek highs against the euro on Friday, as optimism over a breakthrough in U.S. debt ceiling talks and robust economic data reduced the chances of a series of U.S. rate cuts this year.

Negotiators for Joe Biden39;s Democrats told the president on Friday that they are making steady progress in talks with Republicans aimed at avoiding a U.S. default, just days after Biden and top U.S. congressional Republican Kevin McCarthy underscored their determination to strike a deal to raise the government39;s 31.4 trillion debt ceiling.

That eased fears of an unprecedented and economically catastrophic default, leading markets to revise their expectations of where U.S. interest rates could go.

At the same time, data pointing to a stilltight labour market, with the number of Americans filing new claims for unemployment benefits falling more than expected last week, also raised expectations that the Federal Reserve could raise rates again next month to tame inflation.

The dollar index traded at its highest in two months, having risen by nearly 2.5 in the last two weeks alone, as investors have rushed to reassess their expectations for what the central bank might do next.

The message from the Fed has been really hawkish. We know there has been this divergence between what the market39;s expecting and what the Fed has actually been saying and that was always going to need to be reconciled at…