USD: Shutdown hits new record as focus shifts to Supreme Court - MUFG

The US Dollar (USD) advanced to levels above 100 in Dollar Index (DXY) yesterday and EUR/USD broke below the 1.1500-level although the technical breaches of these levels has not as yet triggered any increased momentum for buying. The government shutdown continues and today reached a record 36 days surpassing the previous longest from 2018-19, MUFG's FX analyst reports.

Consensus appears to be in favour of tariffs to be voted down

"There have been some positive noises from Washington suggesting there could be a deal to re-open government. The deal would involve signing a short-term bill to re-open government with some of the 12 annual appropriations bills that are needed to fund government agencies. This would not be a complete resolution but would allow a re-opening. The Democrats in turn would get a vote on expiring ACA subsidies. A deal could be in place by the end of the week. That would then pave the way for the backlog of jobs data to be released. If the labour market has remained weak similar to the data of recent months, that could help prompt a turn in dollar buying momentum."

"Ahead of any government shutdown deal, today we have the Supreme Court hearing of arguments in relation to the legality of using IEEPA for implementing reciprocal tariffs globally. The hearing will be crucial in shaping expectations on the possible outcome of the ruling to be given at a later date, possibly by January. The hearing will begin at 15:00 GMT and is set to last 80 minutes with 40 minutes for the US Solicitor General to defend the legality of the tariffs used under IEEPA followed by 20 minutes for the private business plaintiffs arguing against the tariffs and a further 20 minutes for the coalition of 12 states also arguing against the tariffs. With tariffs estimated to being in up to $400bn in the first twelve months the ruling will have implications for the UST bond market and the dollar. Still, it is highly likely that the Trump administration will have plans in place to offset the removal of IEEPA with greater use of other trade acts to hit imports on a sector-by-sector basis."

"Section 232 (national-security reasons); Section 301 (act against unfair trade practices); Section 201 (halt import surges) are some of the avenues open to Trump. White House Press Secretary Karoline Leavitt stated they are 'preparing for Plan B'. The consensus appears to be marginally in favour of these tariffs being voted down and if today's hearing does shape expectations in that direction then it elevates uncertainties once more and could potentially prompt some turnaround in the recent dollar buying momentum. A government shutdown that brings forward possible labour market data could also encourage some reduction in recently built long dollar positions."