Dollar Weakness Is a Common Feature of Government Shutdowns

Another US government shutdown is a clear risk for the dollar.

During the three most recent episodes — in 2013, early 2018 and late 2018 into 2019 — the Bloomberg Dollar Spot Index drifted lower both during the impasse and in the immediate aftermath.

The 35-day closure from December 2018 to January the following year delivered the most pronounced bout of dollar weakness, underlining how the impact worsens with duration.

The greenback fell by around 2% during that shutdown period. This time round, the US currency is heading for a third straight daily decline, down 0.6% over the period.

Implied volatility in euro-dollar options tends to rise ahead of shutdowns, underscoring that traders are quick to price in disruption risks. But realized swings tell a different story.

In 2013, spot volatility lagged and only briefly spiked once the shutdown began. In January 2018, expectations and delivery lined up, with realized volatility tracking implied almost one-on-one. By contrast, during the prolonged 2018/19 closure, options priced in turbulence that never fully materialized, as realized volatility stayed subdued through much of the impasse.

Vice President JD Vance said he believes a is likely, which would delay the release of key economic indicators, including the monthly employment report scheduled for Friday.

It’s no surprise that options sentiment over the next month has shifted back to neutral on the dollar, erasing last week’s modest bullish bias.