The US dollar fell on Monday amid concerns over a potential partial government shutdown, while the Japanese yen outperformed the euro ahead of a series of key US economic releases that could provide further signals on the Federal Reserve’s policy path.

The dollar had risen last week, supported by economic data that reduced expectations for Fed rate cuts. Traders are currently pricing in a total of 40 basis points in cuts by December, and 110 basis points by the end of 2026 — about 25 basis points less than anticipated in mid-September.

Partial Government Shutdown Looms

The dollar index, which tracks the greenback against a basket of major currencies, dropped 0.22% on Monday to 97.90, after gaining 0.5% last week.

Investors’ primary concern is the risk of a government shutdown if Congress fails to pass a funding bill before the fiscal year ends on Tuesday. Without a deal, parts of the government would shut down on Wednesday, the first day of fiscal year 2026.

Analysts note that the dollar typically weakens ahead of such crises before rebounding once a deal is reached. However, this time the risk may weigh more heavily given the labor market’s existing signs of slowdown. A shutdown could also delay the release of the closely watched nonfarm payrolls report due Friday, along with other economic data.

Bob Savage, head of macro markets strategy at BNY, said: “A prolonged shutdown, which cannot be ruled out, could impair the market’s ability to properly price the Fed’s easing cycle, even if some private data sources help fill part of the gap.”

Investors are also awaiting this week’s reports on job openings, private sector payrolls, and the ISM manufacturing index ahead of Friday’s employment data.

Legal Battle Over Fed Governor Lisa Cook

Markets are closely watching the legal fight over the potential dismissal of Fed Governor Lisa Cook, as any threat to the central bank’s independence poses a bigger risk to the dollar than the shutdown itself.

President Donald Trump’s administration has asked the Supreme Court to allow him to remove Cook, arguing it represents a lawful exercise of presidential authority.

Currency Moves

The euro rose 0.25% to $1.1729, while the British pound gained 0.34% to $1.3445. Analysts believe eurozone inflation data will have limited impact on monetary policy expectations or the single currency, with attention instead focused on the war in Ukraine and the potential for increased military spending.

Against the yen, the dollar fell 0.6% to ¥148.67, after gaining more than 1% last week. Still, diverging monetary policy outlooks remain in focus as signs of a hawkish tilt emerge within the Bank of Japan.

Mohit Kumar, economist at Jefferies, said: “We prefer short positions on USD/JPY and expect further rate hikes from the Bank of Japan.” He added that “some Asian countries may allow their currencies to strengthen as part of trade negotiations with the US.”

Elsewhere, the Australian dollar climbed 0.35% to $0.6571 ahead of Tuesday’s policy decision from the Reserve Bank of Australia, where no change in rates is expected.

Gold prices rose in the European market on Monday, extending gains for a third consecutive session and continuing to set fresh records, as they broke above the $3,800 per ounce mark for the first time ever. The rally was fueled by a weaker US dollar, pressured by the looming risk of a federal government shutdown.

Following last week’s US Personal Consumption Expenditures (PCE) report, markets became more convinced of the likelihood that the Federal Reserve will cut interest rates in October, with investors awaiting further evidence later this week.

Price Overview

• Gold prices today: Spot gold rose about 1.4% to an all-time high of $3,812.11, up from an opening level of $3,760.36, with a session low matching the open at $3,760.36.

• On Friday, gold settled 0.3% higher, marking its second straight daily gain after moderate US inflation data.

• Last week, gold climbed 2.1%, its sixth consecutive weekly gain, the longest winning streak since late December 2024.

US Dollar

The dollar index fell 0.3% on Monday, extending losses into a second session and pulling back from a three-week high of 98.61, reflecting continued weakness against major currencies.

A weaker dollar makes dollar-priced bullion more attractive to holders of other currencies. In addition to profit-taking, the greenback remains under pressure from the risk of a US government shutdown if Congress fails to pass a funding bill before the fiscal year ends on Tuesday. Without a deal, parts of the government will shut down on Wednesday, the first day of fiscal year 2026.

Ray Attrill, head of FX strategy at National Australia Bank, said: “The prevailing assumption is that if the government shuts down, we won’t get new US jobs data this week, which complicates trading in markets.”

US Interest Rates

• Last Friday’s PCE inflation data matched expectations.

• According to the CME FedWatch Tool: Odds of a 25-basis-point Fed rate cut in October rose from 88% to 90%, while odds of no change fell from 12% to 10%.

• To further reprice expectations, markets are awaiting a series of key US labor market reports this week, along with fresh Fed commentary.

Outlook for Gold

• Kyle Rodda, analyst at Capital.com, said: “The positive US inflation reading gave markets reason to believe more Fed rate cuts will come in October and December.”

• He added: “Sentiment is very positive, and we’re on track to retest another record high this week. The gold market is in a strong position right now.”

SPDR Holdings

Holdings at SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, rose by 8.87 metric tons on Friday to 1,005.72 metric tons, the highest since July 29, 2022.

The euro rose in European markets on Monday against a basket of global currencies, extending its rebound for a second straight day from a three-week low against the US dollar, supported by renewed buying at lower levels and a defensive turn in the greenback amid risks of a US government shutdown.

Following the latest European Central Bank (ECB) meeting, which included more hawkish commentary than markets had anticipated, the odds of further rate cuts in Europe by year-end have diminished. To solidify those expectations, investors are awaiting more evidence on the ECB’s path toward monetary easing.

Price Overview

• EUR/USD climbed about 0.25% to $1.1733, up from an opening at $1.1706, after touching a low of $1.1699.

• On Friday, the euro gained 0.3% against the dollar, its first increase in three sessions, recovering from a three-week low of $1.1646.

• Last week, the euro lost 0.4% versus the dollar, its first weekly decline in a month, pressured by mounting geopolitical tensions in Eastern Europe.

US Dollar

The dollar index fell 0.3% on Monday, extending losses for a second session and moving further away from a three-week high of 98.61, reflecting continued weakness of the greenback against major peers.

Beyond profit-taking, dollar levels are being weighed down by the looming risk of a US government shutdown if Congress fails to pass a funding bill before the fiscal year ends on Tuesday. Without passage, parts of the government will close on Wednesday, the first day of fiscal year 2026.

Ray Attrill, head of FX strategy at National Australia Bank, said: “The prevailing assumption is that if the government shuts down, we won’t get new US jobs data this week, which complicates trading in the markets.”

European Interest Rates

• Sources say ECB policymakers believe no further rate cuts are needed to achieve the 2% inflation target, despite new economic forecasts suggesting lower rates over the next two years.

• Sources also noted that unless the eurozone faces another major economic shock, borrowing costs are expected to remain at current levels for some time.

• Money market pricing currently reflects about a 10% chance of a 25-basis-point ECB rate cut in October.

• Traders have scaled back bets on ECB easing, signaling the end of this year’s rate-cutting cycle.

• To reprice expectations, investors are awaiting fresh European economic data and commentary from ECB officials in the coming period.

The Japanese yen rose in Asian markets on Monday against a basket of major and minor currencies, extending its rebound for a second straight day from an eight-week low against the US dollar, supported by buying activity at lower levels and the dollar’s defensive stance amid risks of a US government shutdown.

A split within the Bank of Japan’s board has increased pressure on dovish Governor Kazuo Ueda to move faster on normalizing monetary policy, boosting the likelihood of a Japanese rate hike in October.

Price Overview

• USD/JPY fell 0.4% to ¥148.88, from today’s opening at ¥149.47, after touching a high of ¥149.51.

• The yen ended Friday up 0.2% against the dollar, its first gain in three sessions, after earlier hitting an eight-week low at ¥149.96.

• The yen lost more than 1% against the dollar last week, marking a fifth straight weekly decline and its biggest weekly loss since early July, weighed down by political uncertainty in the world’s fourth-largest economy.

US Dollar

The dollar index fell 0.25% on Monday, extending losses for a second session and pulling back from a three-week high of 98.61 points, reflecting continued weakness of the US currency against major peers.

Beyond profit-taking, the dollar’s retreat is tied to the looming risk of a US government shutdown if Congress fails to pass a funding bill before the fiscal year ends on Tuesday. Without approval, parts of the government will close on Wednesday, the first day of fiscal year 2026.

Japanese Interest Rates

• The Bank of Japan kept interest rates unchanged at 0.5% earlier this month, in line with market expectations.

• However, dissenting calls from two board members for a 25-basis-point hike surprised markets and were seen as a signal that the BoJ is less concerned about economic headwinds than previously thought.

• The dissenters aimed to push Governor Kazuo Ueda to accelerate the pace of rate increases, as tightening is seen as inevitable sooner or later.

• Markets currently estimate about a 50% chance of a 25-basis-point rate hike in October.

• A Reuters poll showed a majority of economists expect another 25-basis-point increase in Japanese interest rates by year-end.

• To reprice those expectations, investors are awaiting further data on inflation, unemployment, and wages in Japan.