The dollar dropped on Monday amid concerns over a potential government shutdown, with the yen outperforming the euro ahead of a batch of U.S. economic releases that could offer further clues on the Federal Reserve’s policy path.
The greenback rose last week following economic data that prompted a pullback in expectations for Fed interest rate cuts.
Traders are currently pricing in 40 basis points of Fed easing by December and a total of 110 basis points by the end of 2026, about 25 bps less than levels seen in mid-September.
PARTIAL US GOVERNMENT SHUTDOWN LOOMS
The dollar index – a measure of its value relative to a basket of foreign currencies – was down 0.22 per cent on Monday to 97.90, having risen 0.5 per cent last week.
Top of investors’ minds was a looming U.S. government shutdown should Congress fail to pass a funding bill before the fiscal year ends on Tuesday.
Without passage of funding legislation, parts of the government would close on Wednesday, the first day of its 2026 fiscal year.
Analysts say the dollar typically weakens ahead of such episodes, before rebounding once the funding dispute is resolved. Markets are likely to see it as a fresh headwind for an already sluggish labour market.
A shutdown would have implications for the release of Friday’s closely-watched non-farm payrolls report, as well as subsequent economic data, which may not be published.
“A long shutdown, which cannot be ruled out, could hamstring the market’s ability to correctly price the course of the Fed’s easing cycle, although private sources of data could fill some small part of the gap,” said Bob Savage, head of markets macro strategy at BNY.
Ahead of Friday’s jobs report, investors will also get figures on job openings, private payrolls and the ISM manufacturing PMI, among others.
LEGAL BATTLE OVER FED GOVERNOR COOK
Investors are also closely watching the legal battle over Federal Reserve Governor Lisa Cook’s potential removal, as any threat to the Fed’s independence poses a far greater risk to the dollar than the government shutdown.
The Trump administration has asked the U.S. Supreme Court to allow President Donald Trump to fire Cook, arguing that her removal would be a lawful exercise of presidential authority.
The euro rose 0.25 per cent to $1.1729, while sterling gained 0.34 per cent to $1.3445.
Analysts expect inflation data from euro zone countries to have little impact on the rate outlook or the single currency, as investors expect policy to remain stable.
Their attention remained on the war in Ukraine and the potential for increased military spending.
Against the yen, the dollar was down 0.6 per cent to 148.67, after having risen more than 1 per cent against the Japanese currency last week.
However the diverging outlook for rates will remain in focus amid signs of a hawkish shift on the Bank of Japan board.
“We favour short position in the dollar/yen,” said Mohit Kumar, economist at Jefferies, adding he expected more rate hikes by the BoJ.
“Also, for a number of Asian countries, offering an off-ramp solution to let their currencies appreciate could be part of the trade negotiations with the U.S.,” he added.
In other currencies, the Aussie was last 0.35 per cent higher at $0.6571. The Reserve Bank of Australia announces its rate decision on Tuesday. Expectations are for the central bank to stand pat on rates.
