With the United States now deep into a government shutdown—now entering its third week—such optimism seems naive. This persistent emergency is raising fears of an economic collapse and budgetary calamity. This extended shutdown—now into its fifth week—still drags greatly on market sentiment, affecting all sectors and all currencies. That picture is changing fast, and US Dollar Index (DXY) is the one stealing the spotlight. It bounces near 98.50 as risk sentiment swings.
The shutdown, now in its third week, has caused serious disruptions across the federal agencies and has real consequences for government services and our economy as a whole. The potential length of the shutdown now has investors and economists on edge. While major negotiations continue on Capitol Hill, stakeholders remain fixed on what happens next, especially if any negotiated settlement involves a resolution to return to business as usual.
In the currency markets, the DXY has bounced off of recent multi-day lows, reflecting a sense of short-lived stabilization in risk sentiment. The US Dollar Index tracks the Greenback’s strength against six other major currencies. For now, that is indicative of the dollar making a short-term comeback. As experts point out, that momentum is at risk of evaporating with the recent return of turbulence within regional banking sectors.
As the Federal Reserve looks to meet the mounting economic challenges, it intends to introduce back-to-back 25 basis-point reductions in the interest rate in its monetary policy sessions this coming October and December. The troubled economic picture is the reason the Fed is taking this expected, highly telegraphed move. All of this has been compounded by the impacts of the government shutdown and deepening banking instability.
The fiscal uncertainty for the United States continues to be uncertain, fueled by these layered elements. Public investors are ever more conscious of the interconnected effects of fiscal policy choices and monetary policy choices on overall market conditions. The Greenback’s performance against its major counterparts is always in focus, with EUR/USD recently trading at 1.1663.
In international trade news, President Trump has recently downplayed his proposed 100% tariffs on Chinese imports, stating that such measures are “not sustainable.” Meanwhile, the United States and China are already in an economic competition marked by rising temperatures. This new direction comes on the heels of Beijing’s move to further tighten rare-earth export controls. Trump has expressed optimism about a potential meeting with Chinese President Xi Jinping in the next two weeks, which could provide an opportunity for dialogue and negotiation on outstanding trade issues.
At the same time, recent Eurozone inflation data surprised little from forecast, with very moderate underlying price pressure in the bloc. This data further complicates an already turbulent global economic environment. Investors are currently analyzing what this means for the Euro of course, and consequently for the US Dollar.
With the risk of the government shutdown continuing to rattle economic sentiment and market dynamism, stakeholders watch closely. In truth, the upcoming fiscal policy changes in Washington will strike an even more fundamental blow to future market conditions. At the same time, the Federal Reserve’s monetary policy making will be key.