How could federal government shutdown affect the US Dollar?

• US government shutdown creates heightened uncertainty for investors.
• Data blackout could influence the Fed's policymaking process.
• The risk-averse market atmosphere is likely to continue to support safe-haven assets.

The United States' (US) federal government officially shut down on Wednesday as lawmakers failed to pass funding by the deadline. Following a second round of voting, the Senate rejected House Republicans' stopgap bill to restore funding. 

Why does government shutdown matter?

During the shutdown period, many federal agencies are forced to cease nonessential operations. As a result, more than 700,000 federal workers are facing being furloughed, while essential workers are being asked to work without pay.

According to the Government Employee Fair Treatment Act of 2019, affected employees will receive back pay once the government funding is restored. In a statement published on Tuesday, the Congressional Budget Office (CBO) explained how much these compensations could cost:

"Using information from the agencies' contingency plans and the Office of Personnel Management (OPM), CBO estimates that under a lapse in discretionary funding for fiscal year 2026 about 750,000 employees could be furloughed each day; the total daily cost of their compensation would be roughly $400 million."

Another critical impact of the shutdown will be on macroeconomic data releases. The US Department of Labor will not publish the weekly Initial Jobless Claims data on Thursday and the Bureau of Labor Statistics will postpone the release of the official employment report, which features the key Nonfarm Payrolls, Unemployment Rate and wage inflation figures that the Federal Reserve (Fed) looks at when deciding on the next policy step. If the shutdown continues, more economic releases will be delayed, making it difficult for policymakers to assess the inflation outlook and the current state of the economy. 

When was the last government shutdown?

The last federal government shutdown, which was also the longest on record, occurred in late 2018 and lasted for 35 days before ending on January 25, 2019. 

How is the 2025 government shutdown different?

The 2025 government shutdown comes at a delicate time when investors are already trying to navigate through heightened uncertainty caused by the new US trade regime, the softening labor market conditions and the cloudy inflation outlook. Although data blackouts also happened in past shutdowns, the Fed's policy was on a steady path and policymakers were not trying to balance inflation and labor market risks.

While past shutdowns raised concerns about the economic outlook, they had little impact on consumer activity. Currently, consumer sentiment is fragile, and a prolonged political dysfunction could further weigh on spending, especially if federal workers continue to lose income. 

In the meantime, European rating agency Scope has already issued a warning, stating that the government shutdown could cause a downgrade in the US's credit rating. "The administration's increasingly unconventional policy approach has placed pressure on the long-standing checks and balances of the U.S. governance system and are seen as credit negative for the U.S. sovereign rating," Scope analyst Eiko Sievert explained, as reported by Reuters.

What is next? 

Investors will keep a close eye on political developments in the US to assess whether Congress is moving toward a funding deal or the impasse is likely to continue. 

In case funding is restored in a relatively short period, in less than 2-3 weeks, the immediate market reaction is likely to help the US Dollar (USD) recover. Conversely, traditional safe-haven assets, such as Gold, the Swiss Franc (CHF) or the Japanese Yen (JPY), are likely to remain in demand if lawmakers fail to find a middle ground in a reasonable time.

In this scenario, comments from Fed officials on how they will approach policy-making if they don't have access to key data will be crucial. The Fed could take a step back and delay policy decisions until it receives the information the central bank needs, or it could take action in anticipation of a potential negative impact of the shutdown on employment, consumer spending and economic growth. 

Markets are fully pricing in a 25 basis-point rate cut in October and see about an 85% probability of one more rate reduction in December, according to the CME FedWatch Tool. The current market positioning suggests that the USD could stage a rebound if the Fed hints at delaying policy easing because of the lack of data.