(Reuters) – The dollar on Wednesday held just shy of a two-month high as U.S. debt ceiling negotiations dragged on, while the pound firmed and then softened after stronger-than-expected British inflation data.

Also in focus was the New Zealand dollar, which dived 1.8% after the country’s central bank flagged an end to rate hikes.

The dollar index which tracks the U.S. currency against six major peers was flat at 103.5, just below Tuesday’s 103.65, its highest since March.

The impasse in Washington over debt ceiling negotiations has helped lift the dollar, even though it could lead to a default and push the country into recession, as investors reckon that could spell worse trouble for the global economy.

Treasury Secretary Janet Yellen has warned that the federal government could no longer have enough money to pay all its bills as soon as June 1, raising the risk of a damaging default.

Investors largely shunned riskier investments as another round of talks between the White House and the Republicans to raise the borrowing limit ended on Tuesday with no sign of progress.

Stronger-than-expected economic data and hawkish remarks from Federal Reserve policy makers have also supported the dollar as markets reassess earlier bets for U.S. rate cuts later in the year.

Markets are pricing in a 27% chance of a 25 basis point hike in June, CME FedWatch tool showed, after the Fed’s quarter point increase earlier this month.

Investors will get more clues on policy outlook from the minutes of the Fed’s May meeting, due later in the day.

“We suspect the base case among the leadership of the committee is that the tightening cycle is probably over,” said Kevin Cummins (NYSE:CMI), chief economist at NatWest Markets.

However, “recent rhetoric from a few officials seem interested in additional hike(s), and this sentiment may well have been reflected in the tone of the minutes.”

In Europe the euro was 0.17% firmer at $1.0786 and the pound was a touch softer at $1.24105, having earlier risen as much as 0.44% to $1.247 in a knee jerk reaction after British inflation slowed by much less than markets had expected, driving expectations of further rate hikes from the Bank of England.

“There can be no sugar-coating of this data and it’s a terrible inflation print that really sets the UK apart from other major developed economies in having a more serious inflation problem,” said MUFG analysts in a note to clients.

They said the British currency should be supported by higher rates trajectory but the there is a chance that the scale of British inflation divergence undermines policy credibility and forces rate hikes weakening growth and undermining the pound’s performance.

Earlier in the day, the Reserve Bank of New Zealand raised interest rates by 25 basis points, as expected, to the highest in more than 14 years at 5.5% but its policy statement forecast that rate would prevail until June, 2024 – unchanged from the earlier forecast.

“The RBNZ was surprisingly dovish in its messages and forecasts,” said Carol Kong, currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) (CBA). “In contrast to market expectations, the RBNZ kept its projected cash rate peak at 5.50% and signaled its tightening cycle is over.”

The kiwi fell to a near three week low and was last down 1.7% at $0.6140. The Australian dollar eased 0.5% to $0.6578.

Elsewhere, the yen was steady at 138.63 per dollar, having touched 138.91 overnight, its softest in six months.