USD slips as shutdown risks weigh on Fed outlook – BBH

US Dollar (USD) slips across the board, BBH FX analysts report.

Treasury yields ease, Gold hits record highs

"Treasury yields are drifting lower along with other major sovereign bond yields. Global equity markets are up. Gold is making new record highs. Underpinning these market moves is the threat of a US government shutdown on Wednesday that could potentially lead to a more dovish Fed. If a shutdown is brief, the Fed will largely ignore it."

"However, a prolong shutdown (more than two weeks), increases the downside risk to growth and raises the likelihood of a more accommodative Fed. We expect USD to range trade until Friday’s US jobs data. The labor market data is the most important driver for the Fed and the most critical data for monitoring downside risks to the economy now."

"As such, if labor demand remains weak, the swaps curve will adjust lower against USD. But if labor demand recovers more than expected, upside for USD is limited, because the swaps curve already implies a cautious Fed easing cycle. 3-year swaps rates are trading above the FOMC’s median 2027-2028 funds rate projections."