US government shutdown: market impact and global currency outlook
The United States has entered its first government shutdown in nearly seven years, triggering modest pressure on the dollar and raising concerns about potential volatility in global markets. The impasse stems from a dispute between former President Donald Trump, now serving a second term, and Congress over the extension of health insurance subsidies.
The last major shutdown occurred in late 2018, lasting a record 35 days amid disagreements over funding for the US-Mexico border wall. Analysts warn that while the latest closure may be short-lived, a prolonged standoff could once again unsettle markets.
Matthew Ryan, CFA and Head of Market Strategy at Ebury, noted: “The dollar has come under a bit of selling pressure, although investors won’t be losing too much sleep just yet. Should the closure extend beyond a few days, however, we could see a flight to safety, with currencies such as the yen and Swiss franc performing strongly.”
He added that an extended shutdown could weaken the dollar if markets anticipate harm to the US economy and faster Federal Reserve interest rate cuts, echoing market behaviour from 2018.
Dollar under pressure
The dollar has traded lower against most currencies this week, largely reflecting jitters over the government closure. A short-lived disruption may be dismissed by markets, but a drawn-out impasse would likely increase volatility. The last shutdown saw the dollar lose 1.5% of its value, a decline analysts warn could repeat if the current standoff endures.
US economic data also presented a mixed picture. Job openings rose unexpectedly to 7.23 million in August, but worker resignations dropped to 3.1 million – the lowest since November – signalling waning labour market confidence. Consumer confidence fell to 94.2, the weakest since April. Crucially, upcoming payroll data and other government statistics will be delayed until Washington reaches a deal.
Euro outlook
The euro has edged higher against the dollar, trading just above $1.17. Investors are awaiting September’s inflation report, with forecasts pointing to a rise to 2.2%. Stronger-than-expected German inflation numbers have fuelled speculation the final figure could surpass expectations. ECB President Christine Lagarde recently described inflation risks as balanced, with markets largely convinced the easing cycle is over.
Sterling under pressure
The British pound faces heightened uncertainty in the final quarter of 2025. Key concerns include the Bank of England’s monetary policy decisions and the UK government’s Autumn Budget in November. While some policymakers have hinted at further rate cuts, others remain wary of inflation risks.
Markets are also speculating about potential tax increases, including a possible VAT hike, despite previous election pledges. Analysts caution that such a move could weigh heavily on sterling by signalling both higher inflation and weaker growth ahead.
