In a tense atmosphere on Tuesday, the U.S. dollar experienced a downturn as market participants prepared for a potential government shutdown that would halt key economic data releases, including the highly anticipated jobs report scheduled for later this week.
The clock was ticking toward midnight on Tuesday, when government funding is set to expire unless a temporary spending deal can be reached between Republicans and Democrats. A recent meeting at the White House between President Donald Trump and his opponents yielded little progress, leaving the fate of government operations uncertain and creating further anxiety among investors.
The upcoming payrolls report is critical for Federal Reserve policymakers, and any delays due to the shutdown could leave the central bank without vital information regarding the state of the labor market. The President of the Federal Reserve Bank of New York, John Williams, indicated that he has become increasingly concerned about emerging signs of labor market weakness, a factor that influenced his recent support for interest rate cuts at the latest Federal Reserve meeting.
Elias Haddad, a senior market strategist at Brown Brothers Harriman, observed, “If a shutdown is brief, the Fed will largely ignore it. However, a prolonged shutdown, extending beyond two weeks, would amplify downside risks to growth and increase the likelihood of a more accommodative stance from the Fed.” Financial markets are currently pricing in an expectation of 42 basis points of Fed easing by December and a cumulative total of 104 basis points by the end of 2026, marking about a 25 basis point decrease from projections in mid-September.
This context places the dollar in a precarious position, as the broader U.S. currency index, which has already fallen 9.7% this year, eased slightly to 97.948 during early trading hours in Asia. Against a largely stable euro priced at $1.17275 and sterling at $1.3433, the U.S. dollar is navigating a challenging landscape.
Market analysts, including Tony Sycamore from IG, noted that while the potential for a government shutdown may lead to a delay in the Jobs report, historical data suggests that the impact on GDP tends to be modest. Any economic disruptions witnessed during a shutdown are typically offset quickly once it concludes.
Meanwhile, the Australian dollar held steady at $0.65795 ahead of an impending policy decision from the Reserve Bank of Australia (RBA). It is largely expected that the RBA will maintain interest rates as economic growth has shown signs of recovery in the second quarter and unemployment rates have remained relatively stable. Following multiple rate cuts earlier this year, the RBA has found itself in a position to slow this pace of easing. Despite this, the Australian dollar has gained over 6% in 2023, influenced by a weaker U.S. dollar and a favorable risk appetite. However, its growth for September has been more conservative, advancing only 0.6% after reaching an 11-month peak two weeks prior.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, expressed that the RBA is likely to avoid providing any forward guidance about further rate cuts given the growing tension between the bank’s dual objectives of curbing inflation and achieving full employment.
In Asia, the Japanese yen traded slightly weaker at 148.72 per U.S. dollar as traders mulled the Bank of Japan’s recent summary of opinions from its September policy meeting. The document indicated a growing consensus among board members regarding the appropriateness of considering a near-term interest rate hike, with one opinion suggesting that the time might be right for adjustments since it has been over six months since the last rate increase. Although the Bank of Japan opted to keep rates steady in its September meeting, it faced dissent from two board members advocating for a hike. Currently, traders are pricing in a 60% likelihood of a rate increase taking place by December.
