US Dollar at Risk of More Losses amid Shutdown Woes, Fed DilemmaThe US dollar TVC:DXY has been knocked by last week’s US government shutdown and the subsequent economic blackout. At the same time, the Federal Reserve can’t figure out what’s worse – inflation or job crunch.
After Congress failed to pass a funding bill, the government officially went dark at 12:01 a.m. Wednesday.
Traders, however, didn’t panic. Stocks climbed to fresh record highs , gold OANDA:XAUUSD popped, yields dipped — and the dollar slipped further into the red .
The greenback, usually the go-to safe haven during global turmoil, is acting like it forgot about that job description. With the Federal Reserve cornered between a slowing economy and stubborn inflation, plus fresh political uncertainty in D.C., the dollar’s shine is fading fast.
⚖️ When Politics and Policy Collide
Let’s start with the elephant in the room: the government shutdown. Historically, these dark D.C. moments shave about a tenth of a percentage point off GDP per week. In other words, the economy loses a few hairs — not a limb. But this one hits differently.
That’s because the Fed is already walking a tightrope. With unemployment creeping up ( 4.3% in August and lost jobs in June ) and inflation still running at 2.9% , the central bank has little margin for error.
The longer the shutdown drags on, the harder it becomes for policymakers to parse what’s real economic weakness and what’s just delayed government paychecks.
Investors, meanwhile, are pricing in a full quarter-point rate cut at the Fed’s next meeting and another one in December. The market is betting that Powell & Co. will prioritize saving jobs over fighting inflation. And that typically means one thing: a softer dollar.
📉 The Dollar’s Safe-Haven Cred Takes a Hit
Remember when the dollar used to rally whenever things got messy? Not this year. Despite trade tensions, geopolitical flare-ups, and now a full-blown government shutdown, the dollar has lost roughly 10% since January.
Part of that weakness stems from shifting interest-rate expectations. When the Fed signals it’s going to cut, yields on US assets drop — and so does the appeal of holding dollars.
Lower rates make borrowing cheaper, but they also mean less income for investors parking money in dollar-denominated bonds.
The euro took advantage, climbing above $1.17 as traders rotated out of the greenback.
Gold also basked in the dollar’s weakness, closing Friday at $3,886 an ounce — a fresh all-time closing high.
And just to rub salt in the wound, even cryptocurrencies have outperformed. Bitcoin BITSTAMP:BTCUSD , the digital rebel of finance, has gained about 35% this year and on Sunday hit a record high above $125,000 per coin.
🧩 Fed Dilemma: Jobs vs. Inflation
The Federal Reserve’s dual mandate is simple on paper: keep prices stable and employment high. But right now, the two goals are in open conflict.
On the one hand, the labor market is clearly slowing. August brought just 22,000 new jobs — the weakest print since early 2020. Revised data for June showed the economy actually lost 13,000 staffers net. Those aren’t the kinds of numbers that inspire confidence.
On the other side, inflation is still running above target. Core PCE, the Fed’s favorite measure, clocked in at 2.9% in August — unchanged from July but still nearly a full percentage point above the goal.
So what’s the play? Cut rates to support jobs and risk stoking inflation? Or hold firm, keep inflation contained, and risk a deeper slowdown? That’s the central banker’s version of “Would you rather.”
👀 The Fed’s Independence (and the Trump Factor)
There’s another layer of intrigue: politics. The Supreme Court just deferred a hearing on President Trump’s attempt to remove Fed Governor Lisa Cook — a Biden appointee — until January.
Cook can remain at the Fed in the meantime, but the episode has traders questioning just how independent the central bank really is under the new administration.
Fed Chair Jerome Powell, nearing the end of his term, has been caught between maintaining credibility and avoiding direct political confrontation. His latest move — a quarter-point rate cut in September — was meant to show responsiveness to data, not pressure. But optics matter, and the market is watching for signs of interference.
If investors start believing the Fed is bending to political will, confidence in US monetary policy could erode further — another potential strike against the dollar.
💡 What It Means for Traders
Here’s the breakdown:
• For FX traders: The dollar remains vulnerable, especially if the Fed confirms more cuts are on the way. Pairs like FX:EURUSD and FX:GBPUSD could see more upside. Meanwhile, FX:USDJPY might stay volatile as yen buyers return to their comfort zone.
• For gold bulls: Lower yields and a weaker dollar create the perfect storm. Gold looks strong despite charting new horizons, though traders should watch for a potential pullback if the Fed’s tone shifts.
• For equity investors: Rate cuts are generally bullish. Cheaper money means higher valuations — at least until inflation becomes a problem again.
• For crypto enthusiasts: A dovish Fed tends to favor risk assets, and Bitcoin could benefit as a hedge against both inflation and institutional confusion.
🧮 The Shutdown Math: Small Impact, Big Symbolism
Economists will tell you that a shutdown doesn’t tank the economy — but it does rattle sentiment. Each week of a federal closure trims GDP growth by about 0.1 percentage point. If this one matches the 35-day record from 2018–19 (during Trump’s first term), we’re looking at a 0.5% haircut. Manageable, but not ideal when the economy’s already wobbling.
More concerning is what a prolonged shutdown means for data flow. If key reports like nonfarm payrolls ECONOMICS:USNFP or CPI ECONOMICS:USCPI get delayed, the Fed will be in the dark heading into its next meeting — and that’s when mistakes happen.
Markets hate uncertainty, and uncertainty is the shutdown’s main export.
🧭 The Road Ahead
The dollar’s trajectory from here depends on whether the Fed can strike the right balance. If Powell emphasizes employment and doubles down on cuts, you may expect the greenback to weaken further. But if inflation surprises to the upside, markets could quickly reverse their dovish bets.
Make sure to keep an eye on the Economic calendar . September’s inflation hits October 15 and the Fed’s meeting is on deck for October 28-29.
Off to you : Where do you see the dollar by year end? Share your thoughts in the comment section!
