The dollar dropped on Monday amid concerns over a potential government shutdown, with the yen outperforming the euro ahead of a batch of US 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.
The dollar index – a measure of its value relative to a basket of foreign currencies – was down 0.22 percent on Monday to 97.90, having risen 0.5 percent last week.
Top of investors’ minds was a looming US 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 labor 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for the release of Friday’s closely-watched non-farm payrolls report, as well as subsequent economic data, which may not be published.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.
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.
