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US Dollar Choppy After Government Shutdown, Breaks Lower on Euro Strength

Benjamin Spier

Talking Points:

  • US Dollar Index choppy after government shutdown
  • USD breaks lower during Draghi’s less dovish than expected comments

A look back at the past 24 hours of Forex trading using movements in the US Dollar Index:

US Dollar 15-Minute 08:00 10/01 to 08:00 10/02 EST

Graphic_Rewind_US_Dollar_Choppy_After_Government_Shutdown_Breaks_Lower_on_Euro_Strength_body_Picture_1.png, US Dollar Choppy After Government Shutdown, Breaks Lower on Euro Strength

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Pre-government shutdown declines in trading of the Dow Jones FXCM Dollar Index were reversed over the course of yesterday’s NY session, reflecting market indecision regarding the connection between the US Dollar and the shutdown.

On the one hand, the US Dollar trades as a safe haven currency in three of the four pairs that make up the index, and the government shutdown has released waves of uncertainty ahead of the more important upcoming debt ceiling and a possible debt default, which may be encouraging flows to safe haven. However, the government shutdown is detracting from regular government spending, which will hurt economic performance and possibly lead to a further delay of a Fed taper, and is therefore US Dollar negative.

That is why the greenback has shown such varied reaction to the initial shutdown and a continuation of the political deadlock into a second day of reduced government activity.

At the start of today’s NY session, the US Dollar index declined below 10,500 on Pound and Euro strength. Markets seemed to be expecting no rate cut and plenty of dovish tone from the ECB after its monthly meeting. So, when Draghi mixed in comments about an improving economy, balanced inflation expectations, and no intentions for Euro exchange intervention with his usual dovish rhetoric, the Euro rallied to a new seven month high.

At the same time, Italy Prime Minister Letta survived a confidence vote in the Senate, adding to the image of stabile Europe and contributing to the Euro and Pound rallies against the US Dollar.

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Charts created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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