By Samuel Indyk

LONDON The U.S. dollar rose for a second day on Tuesday, briefly touching a six-month peak against Japan's yen, on expectations that U.S. interest rates will remain higher for longer, while ongoing debt ceiling negotiations kept investors on edge.

Among a slew of Federal Reserve heavyweights who spoke on Monday, some hinted that the central bank had further to go in tightening monetary policy.

Minneapolis Fed President Neel Kashkari said that U.S. rates may have to go "north of 6%" for inflation to return to the Fed's 2% target, while St. Louis Fed President James Bullard said the central bank may still need to raise by another half-point this year.

With U.S. policymakers sounding a preference for higher rates, traders ramped up bets that the Fed funds rate will stay elevated, with markets pricing in almost a 30% chance of a rate hike in June and the Fed funds rate seen at about 4.75% in December.

"Hawkish Fed comments have lifted rate hike expectations and that is one reason why the dollar is firmer across the board," said Niels Christensen, chief analyst at Nordea.

The dollar index, which measures the U.S. currency against a basket of major peers, rose 0.3% to 103.53, not far from a roughly two-month high of 103.63 hit last week.

Meanwhile, euro zone business growth slowed slightly more than expected, but remained resilient this month as the bloc's dominant services industry lost a little of its shine and the downturn in the manufacturing sector deepened, a survey showed on Tuesday.

The euro slipped 0.3% to $1.0778 and is down over 2% for the month thus far, reversing two straight months of gains.

Sterling shrugged off Britain's growth upgrade from the International Monetary Fund and slipped as much as 0.5% to a one-month low of $1.2373 after Tuesday's PMI survey painted a contrasting picture for British businesses with services firms reporting growth in May, while manufacturing businesses shrank again.

Flash PMI figures from the United States are due later on Tuesday.

'X-DATE' LOOMS

Also on investors' minds were concerns over a looming debt ceiling deadline in the United States, which put a lid on risk sentiment and supported the safe-haven U.S. dollar.

President Joe Biden and House Speaker Kevin McCarthy ended discussions on Monday with no agreement on how to raise the U.S. government's $31.4 trillion debt ceiling and will keep talking with just 10 days before a possible default.

"Markets are still expecting some sort of deal to be reached," Nordea's Christensen said.

"An agreement should spark some more risk-on sentiment which could be negative for the dollar," he added.

Short-end U.S. Treasury yields have jumped still, reflecting market jitters, with the yield on the one-month Treasury bill rising to a record 5.904%. Yields rise when bond prices fall.

Against the Japanese yen, the dollar rose to a near six-month peak of 138.88 in Asian trade but was last 0.1% lower at 138.5 yen.

The Aussie slipped 0.5% to $0.6623, while the New Zealand dollar fell 0.5% to $0.6252.

The resilient U.S. dollar kept the offshore yuan pinned near its recent five-month low and it last bought 7.0675 yuan.

China on Monday kept its benchmark lending rates unchanged, as a weakening yuan and widening yield differentials with the United States limited the scope for any substantial monetary easing to shore up the country's post-COVID economic recovery.

(Reporting by Samuel Indyk in London and Rae Wee in Singapore; Editing by Sam Holmes, Christina Fincher and Emelia Sithole-Matarise)