The US Dollar Index (DXY), which measures the strength of the US Dollar against a basket of six major currencies, is trading lower around 98.90 during the early Asian session on Friday. The dollar remains under pressure as concerns about the ongoing US government shutdown, now in its 24th day, continue to cast uncertainty over the economy.
The shutdown has led to the second-longest federal funding lapse in US history, with no clear resolution in sight. This instability is fueling doubts about US economic governance and its potential impact on the dollar.
The Republican-backed stopgap bill, which was meant to temporarily fund the government, failed to pass the Senate once again on Wednesday, marking the 12th failed attempt. A divided Senate voted 54-46 along party lines, highlighting the deadlock in Congress. As the government shutdown extends, there are growing concerns that investor confidence in the US economic framework could erode, contributing to the dollar’s weakness against its global counterparts.
Looking ahead, the release of the US September Consumer Price Index (CPI) report later today will be a crucial focus for traders. Economists are predicting a 0.4% month-over-month rise in the headline CPI, which would bring the annual inflation rate to 3.1%. Core CPI, which excludes volatile food and energy prices, is expected to show a 0.3% monthly increase, also marking a 3.1% year-on-year rise.
The Federal Reserve, which has been grappling with a mix of economic uncertainty and inflationary pressures, is anticipated to lower interest rates by 25 basis points next week, with another potential cut in December, according to a Reuters poll of economists.
Fed Chairman Jerome Powell indicated that despite the delayed release of key economic data due to the shutdown, the Federal Open Market Committee (FOMC) would rely on alternative data sources to make its upcoming policy decisions.
If the CPI data comes in higher than expected, it could trigger a short-term rally in the US Dollar as markets adjust their expectations for future monetary policy. However, the ongoing fiscal uncertainty and political deadlock in Washington could limit the dollar’s upside potential, as investor sentiment remains fragile.
