Greenback Recovers from Early Decline
The U.S. dollar steadied on Wednesday after a volatile trading session shaped by political turmoil in Washington. The dollar index, which measures the greenback’s strength against six major peers including the euro and Japanese yen, was last up 0.02% at 97.79. Earlier in the day, it fell more than 0.2%, briefly positioning the currency for its steepest annual decline in 22 years.
The recovery came as traders weighed the likely fallout from the government shutdown, which began after the Senate failed to pass a short-term funding measure. The impasse has further heightened uncertainty in global markets already wary of slowing U.S. growth and fiscal instability.
Shutdown Fuels Market Concerns
The shutdown followed Democrats’ push for a measure that includes an extension of enhanced Obamacare tax credits, a sticking point in negotiations. President Donald Trump countered with threats of benefit cuts for “large numbers of people” should a deal remain elusive. The stalemate underscores deep partisan divides and complicates the outlook for fiscal policy heading into the final quarter of the year.
While shutdowns historically weaken the dollar, analysts caution that the scale of any decline depends on investor behavior and how long the political gridlock persists. In past shutdowns, demand has often shifted to safe-haven currencies such as the yen, Swiss franc, and euro.
Analyst Views on Dollar Outlook
Citigroup FX analyst Daniel Tobon noted that persistent market pessimism toward the greenback could be exacerbated by further political instability. “Historically, shutdowns have corresponded with a weaker USD, though primarily against safe haven currencies,” he wrote. “Given persistent U.S. dollar pessimism in the current market narrative, further increased political uncertainty should also pressure the USD lower.”
Still, Tobon emphasized that a swift resolution could minimize the damage. “A quick resolution to the shutdown could lead to limited follow-through, keeping us in similar ranges to recent months,” he added, pointing to investor expectations of continued sideways trading rather than a dramatic shift in dollar momentum.
What Traders Are Watching
Market participants are closely monitoring developments in Congress for signs of a breakthrough, as prolonged uncertainty could weigh on U.S. credit markets and weaken confidence in the currency. Attention is also on upcoming Federal Reserve policy decisions, with officials relying on incomplete economic data due to the shutdown.
For now, the dollar remains trapped between political risk at home and cautious global demand, leaving traders to brace for further volatility as negotiations in Washington continue.