Dollar falls on U.S. government shutdown, now on pace for worst annual decline in 22 years

The dollar index fell 0.2% to 97.61 following the US government shutdown, contributing to a projected 10% annual decline for 2025, which would be the largest since 2003. This political uncertainty, historically linked to a weaker USD against safe-haven currencies, also propelled gold futures to a new all-time high above $3,900/ounce. Analysts anticipate further pressure on the dollar from ongoing US political uncertainty, though a rapid resolution could limit the long-term impact.

Analysis

The U.S. dollar is under significant pressure, with the dollar index falling 0.2% to 97.61 following a U.S. government shutdown. This decline contributes to a potential 10% annual loss for the currency in 2025, which would mark its weakest performance since 2003. The shutdown, triggered by a failure to pass a funding bill amidst political disputes, aligns with historical precedent where such events weaken the dollar, particularly against safe-haven currencies like the yen and euro. According to Citigroup analysis, persistent U.S. political uncertainty is likely to extend this downward pressure, reinforcing the market's existing bearish sentiment on the dollar. However, the analyst also cautions that a rapid political resolution could limit the negative impact, potentially keeping the currency within its recent trading ranges. A direct consequence of the dollar's fall is the rally in dollar-denominated commodities, with gold futures surging to a new all-time high above $3,900 an ounce as investors seek safe-haven assets.

Key Decisions for Investors

• Given the negative sentiment and historical precedent, investors should consider tactical short positions on the U.S. dollar, while remaining alert to political news as a swift resolution could trigger a sharp reversal.
• Long positions in gold or other precious metals may serve as an effective hedge against both U.S. dollar weakness and the ongoing political uncertainty, capitalizing on the flight-to-safety trend.
• Consider relative value trades that favor safe-haven currencies, such as the Japanese yen and the euro, against the U.S. dollar to leverage the typical performance pattern during periods of U.S. political instability.