Dollar soft as possible US shutdown, jobs report delay hurt sentiment

The U.S. dollar is under pressure due to looming government shutdown risks, which could delay key economic data like the jobs report and potentially force the Federal Reserve to operate without full information, leading to a more accommodative stance if the shutdown is prolonged. This uncertainty has led traders to price in further Fed easing by year-end and into 2026. Concurrently, the Australian dollar remained stable ahead of an anticipated RBA rate hold, while the Japanese yen saw slight weakness despite the Bank of Japan's September meeting summary revealing discussions about a near-term rate hike, with a 60% probability now assigned to a December hike.

Analysis

The U.S. dollar is exhibiting weakness amid heightened uncertainty stemming from a potential U.S. government shutdown, which threatens to delay the release of crucial economic data, including the upcoming non-farm payrolls report. This data disruption could impair the Federal Reserve's decision-making, with a prolonged shutdown of over two weeks seen as increasing downside risk to growth and raising the likelihood of a more accommodative policy stance. Markets are currently pricing in 42 basis points of Fed easing by December, reflecting this dovish tilt which is further supported by New York Fed President John Williams' recent comments on emerging labor market weakness. In contrast, the Japanese yen is showing slight weakness despite growing conviction for monetary tightening from the Bank of Japan; the BOJ's September meeting summary revealed internal debate on a near-term rate hike, with traders now pricing a 60% probability of an increase in December. Meanwhile, the Australian dollar is holding steady as the Reserve Bank of Australia is widely expected to pause its easing cycle, having already cut rates three times this year amidst signs of improving economic growth.

Key Decisions for Investors

• Monitor the U.S. government shutdown timeline, as a prolonged event beyond two weeks could trigger further U.S. dollar weakness by forcing a more dovish Federal Reserve stance.
• Consider the growing policy divergence between the U.S. and Japan, as the market increasingly prices in a Bank of Japan rate hike by December while the Fed's outlook softens.
• The Australian dollar may offer relative stability against the USD, as the Reserve Bank of Australia is expected to remain on hold, contrasting with the policy uncertainty in the United States.
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