US dollar declines before important data amid government shutdown concerns

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.