Why a government shutdown could undercut the U.S. dollar rally

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A U.S. government shutdown could make the Federal Reserve hesitant to deliver another rate hike and undercut the dollar’s recent rally, analysts said.

The U.S. federal government is heading towards a partial shutdown Sunday morning, if Congress proves unable to pass relevant funding legislation before then. 

Read: U.S. government shutdown: Here’s how a partial closure could affect you

The shutdown could eventually result in a delay of key inflation data, which will be an essential figure for Fed policy makers as they weigh whether to deliver another rate increase, according to Edward Moya, senior market analyst at Oanda.

Last week, the Fed engineered a hawkish pause, holding interest rates steady while indicating a majority of officials expect one more quarter-point interest rate hike by the end of the year. The Federal Open Market Committee will hold its next meeting on Nov. 1-2.

A government shutdown, if it happens, won’t be expected to last long, so its impact on economic growth is likely to be minor and recouped later, Moya said in emailed comments to MarketWatch. 

Trading around the U.S. dollar is likely to be choppy in the next few days, Moya added. The greenback has shown continued strength for the past few weeks, with the ICE U.S. Dollar Index
DXY,
a gauge of the buck’s value against a basket of its biggest rivals, up 1.8% during the past month. 

However, “if the Fed doesn’t get the inflation data they need to make a policy decision, they will likely keep rates on hold, which could be dollar negative,” Moya said. 

A U.S. government shutdown could also put pressure on consumer spending, noted Quincy Krosby, chief global strategist at LPL Financial. 

Although Social Security and Medicare benefits are typically issued even during a government shutdown , there’s a fear that they won’t go out on time. “As we inch closer to the deadline, uncertainty edges higher,” Krosby said in a call. 

Also read: What a government shutdown would do to Social Security payments — and what you really should be worried about

Except some that are deemed essential, hundreds of thousands of federal workers would also be furloughed without pay, although in the past, they have been entitled to back pay. There could be delays in government-backed mortgage applications and small business loans as well. 

If consumer spending is significantly hindered due to a government shutdown and the market expects the Fed to start cutting interest rates sooner than previously anticipated, it could lower Treasury yields and benefit stocks, Krosby said.

“From a negative standpoint, you don’t want a government shutdown,” She said. “But from a positive standpoint, that may help underpin the [stock] market going into October.”

Source
Las Vegas News Magazine

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