Dollar Slides as Shutdown Clouds Fed Outlook

Key Takeaways:

• U.S. government shutdown furloughs 750K workers, risks delaying NFP release.

• Fed officials push back, citing persistent inflation risks.

• Gold retreats slightly from $3,895 but stays underpinned by safe-haven flows.

Market Summary:

The U.S. Dollar remained under pressure this week, weighed down by political dysfunction and a weakening labor market. The U.S. federal government has officially shut down after Congress failed to pass a funding bill, suspending most services and furloughing 750,000 workers. This marks the first shutdown since 2018–2019 and raises uncertainty over how long it will last. For traders, the key concern is that Septembers Nonfarm Payrolls and unemployment data may not be released, depriving the Federal Reserve of critical inputs for its policy outlook.

In the absence of official data, investors have turned to private-sector reports, which signaled a clear slowdown. ADP recorded a surprise contraction of 32,000 jobs in September, while Challenger data showed the weakest hiring plans since 2009 and the highest layoffs since 2020. These developments fueled aggressive market bets on policy easing, with traders pricing a near-certain 25-basis-point cut in October and strong odds of another in December.

The dollar managed to find a fragile floor as Fed officials pushed back against these expectations. Dallas Fed President Lorie Logan emphasized that inflation is still “above target, trending higher,” while Chicago Fed President Austan Goolsbee cautioned against “overly frontloading” cuts. Their remarks slowed the selloff, but with political gridlock threatening GDP and a fragile labor market, the broader trend for the greenback remains tilted to the downside.

Gold, meanwhile, has emerged as the clear beneficiary of this uncertainty. After touching a record near $3,895, the metal eased slightly on profit-taking and a modest dollar rebound. Still, safe-haven demand remains strong, with ETF holdings at a three-year high and major banks reaffirming gold as a top conviction trade, extending targets toward $4,000. With the Fed potentially forced to “fly blind” if the shutdown drags on, dips in gold are likely to be treated as buying opportunities as political and monetary risks continue to dominate.