As the U.S. federal government entered a shutdown again for the first time in six years, risk-off sentiment is surging in global financial markets. However, the U.S. dollar, traditionally seen as a prime haven, is failing to gain traction in this phase and is weakening.
On the 1st (local time), according to Barron's and other U.S. investment outlets, gold prices are soaring in international financial markets day after day. Gold futures broke above $3,900 per ounce to set a new all-time high, and spot prices were also transactioned around $3,895, delivering a revenue of nearly 48% compared with the start of the year. It is evidence that investors are choosing gold as the safest asset in times of turmoil. By contrast, the dollar's value clearly weakened. The U.S. Dollar Index (DXY) fell to 97.52 and declined more than 1% over the past five days. During the same period, the Japanese yen rose 1.7% against the dollar. With manufacturing and capital expenditure indicators beating expectations and safe-haven demand added on, the yen's haven status strengthened.
Political uncertainty is cited as the backdrop for the weaker dollar. With Congress failing to agree on a budget, the federal government has come to a halt, and President Donald Trump went so far as to mention the possibility of outright regular layoffs for nonessential federal employees, not just temporary furloughs. This is adding to the burden on an already weak job market and consumer sentiment. There is also speculation that the Bureau of Labor Statistics (BLS) could delay releasing employment data due to the shutdown. The Federal Reserve (Fed) is set to hold a currency policy meeting in Oct., and gaps in key indicators are expected to heighten market uncertainty and complicate the rate decision.
Market experts see this bout of dollar weakness as possibly more than a temporary blip. Chris Turner, head of global markets at ING Group, said, "The longer the government shutdown lasts, the greater the shock to the economy, and the dollar could lose its appeal as a safe asset." Paul Donovan, an economist at UBS, also noted, "If there is a gap in reliable statistics, markets will sway on speculative information," adding, "This will act as a negative factor for the dollar's value."
Still, some say the weak dollar could be a paradoxical boon for U.S. corporations. Large U.S. multinationals earn more than 40% of their sales overseas, and a weaker dollar inflates foreign-currency sales when converted into dollars. Historical cases show that if the dollar stays weak for six months, profits at Standard & Poor's (S&P) 500 corporations increased by close to 6% on average. That outpaced the overall average of 4% during the same period.
Even so, the overall risks remain. John Hardy, head of global macro strategy at Saxo Bank, said, "The stock market is near all-time highs in transaction, but the possibility of a U.S. slowdown is growing," and projected, "The Trump administration's tariff and trade policies could reduce capital inflows while boosting expectations for Fed rate cuts, pressuring the dollar's value." He added, "The dollar will not lose its reserve currency status immediately, but its standing as a safe asset could be weakened in the short term by other assets such as gold and the yen."