By Samuel Indyk and Rae Wee

LONDON (Reuters) - The U.S. dollar inched higher for a second day on Tuesday - touching a six-month peak against Japan's yen - on expectations that U.S. 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 another half-point this year.

Against the Japanese yen, the greenback rose to a near six-month peak of 138.88 in Asia trade. The dollar was last 0.1% lower at 138.445 yen.

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 around a 20% chance of a rate hike in June and the Fed funds rate seen at about 4.7% 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 euro slipped 0.2% to $1.0795 and is down around 2% for the month thus far against a stronger dollar, reversing two straight months of gains.

Euro zone business growth slowed slightly more than thought 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.

Sterling was down 0.3% at $1.24.

Flash PMI figures from the UK and 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 last at 5.881%. Yields rise when bond prices fall.

The yield on the two-month Treasury bill rose to a roughly three-week high of 5.556%.

Against a basket of currencies, the U.S. dollar rose 0.1% to 103.41, not far from a roughly two-month high of 103.63 hit last week.

The slipped 0.4% to $0.6625, while the fell 0.4% to $0.6258.

The resilient dollar kept the pinned near its recent five-month low and it last bought 7.0661.

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