Dollar Weakness Is a Common Feature of Government Shutdowns

Core Viewpoint - The potential US government shutdown poses a significant risk to the dollar, compounding existing pressures from interest rate cuts and political challenges to the Federal Reserve's independence [1][2]. Group 1: Impact of Government Shutdown on the Dollar - The likelihood of a government shutdown is high, which could negatively impact the dollar [2]. - Historical data shows that during previous shutdowns, such as the 35-day closure in late 2018, the dollar weakened significantly, dropping around 2% during that period [3]. - Currently, the dollar has experienced a third consecutive daily decline, down 0.7%, and has fallen over 8% this year [4]. Group 2: Market Reactions and Volatility - Implied volatility in euro-dollar options tends to increase ahead of shutdowns, indicating that traders are pricing in potential disruptions [5]. - Historical patterns show that while implied volatility rises, realized volatility may not always align, as seen during the 2018/19 shutdown where realized volatility remained subdued [6]. - Market sentiment regarding the dollar has shifted back to neutral, indicating a reduction in bullish bias as the potential for a shutdown looms [7]. Group 3: Strategic Insights - Analysts expect modest dollar weakness against currencies like the yen, Swiss franc, and euro if a shutdown occurs, but a quick resolution could limit further declines [8].