U.S. Dollar Slips to One-Week Low as Government Shutdown Sparks Fed Rate Cut Bets

Dollar Weakens Amid Political Gridlock

U.S. dollar slid to a one-week low, pressured by political dysfunction in Washington and the fallout from the government shutdown. The dollar index (DXY) dropped by 0.2%, slipping to 97.63, with intraday lows near 97.58. This decline reflects investor unease as the closure of federal agencies threatens to delay vital economic reports, complicating the Federal Reserve’s policy path.

The dollar’s weakness was mirrored across major pairs. The euro advanced modestly, the yen strengthened, and commodity-linked currencies like the Australian dollar gained ground, supported by stronger demand for risk-sensitive assets.

Shutdown Complicates Fed Outlook

The shutdown has far-reaching implications for monetary policy. With federal data releases suspended, markets lose access to critical indicators such as nonfarm payrolls and CPI, leaving traders blind to the labor market’s true condition.

As a result, investors are now leaning more heavily on private-sector reports like ADP employment to gauge economic health. This has fueled speculation that the Federal Reserve may need to act preemptively, with futures pricing in a near-certain October rate cut.

Lower rates would reduce the dollar’s yield advantage, weakening its appeal compared to other currencies and pushing investors toward alternative hedges such as gold and cryptocurrencies.

Global FX Developments Add Pressure

Several global developments added to the dollar’s slide:

U.S.–South Korea Pact: Both nations reaffirmed they will not manipulate currency rates for trade advantage, limiting Washington’s flexibility to counter volatility.
Japan’s $550 Billion U.S. Investment Package: Tokyo emphasized the plan would not be used to influence FX markets, signaling a stable yen-dollar outlook.
Japan’s Business Mood Improves: A Bank of Japan survey found manufacturers more optimistic despite U.S. tariff risks, suggesting resilience that could support the yen.
Japan PMI Data: On the downside, factory activity contracted sharply, posting its weakest result in six months, tempering expectations for aggressive BOJ tightening.

These factors highlight the complexity of the global FX landscape, where both economic fundamentals and political commitments are reshaping currency flows.

Nomura Expands FX and Rates Trading

In response to heightened volatility, Nomura Holdings announced an expansion of its global FX and rates trading units. The move underscores expectations of increased demand for hedging and speculative activity as investors brace for choppy conditions.

The decision reflects a broader trend: financial institutions are positioning themselves for prolonged uncertainty in global markets, where currencies may play an outsized role in absorbing shocks from fiscal instability and policy shifts.

Technical Picture: Dollar Under Pressure

From a technical standpoint, the dollar index has broken below its short-term support level at 98.00, leaving it vulnerable to further declines. Key downside levels include 97.20 and 96.80.

If the shutdown persists and the Fed signals a rate cut at its October meeting, the dollar could test these levels quickly. Conversely, any surprise resolution in Congress combined with stronger-than-expected private employment data might offer temporary support.

Investor Sentiment: Defensive but Opportunistic

Market sentiment toward the dollar has shifted decisively in recent days. Hedge funds have trimmed long dollar positions, while asset managers are diversifying into other G10 currencies and emerging-market FX.

At the same time, opportunistic traders see volatility as a chance to capture short-term gains. The divergence between U.S. political instability and relatively stronger conditions abroad could create profitable opportunities in cross-currency trades, particularly in euro-dollar and dollar-yen pairs.

Conclusion

The U.S. dollar’s decline, reflects more than just short-term political turmoil. It highlights deeper concerns about fiscal stability, monetary policy uncertainty, and America’s role in global markets. As the government shutdown continues and the Federal Reserve edges closer to rate cuts, the dollar faces mounting pressure.

For now, global investors are hedging their bets — balancing exposure to traditional safe-havens like the yen and euro, while also considering commodities and cryptocurrencies as alternative stores of value.