Dollar Sinks on Shutdown Shock, Worst Annual Drop in 22 Years

Shutdown knocks greenback; “worst annual drop in 22 years” back in play

The dollar sinks as a U.S. government shutdown begins, with the dollar index slipping to fresh multi-week lows while traders brace for delayed federal statistics and a heavier reliance on private data. Fresh declines put the greenback back on track for what several desks have framed as its worst annual drop in 22 years, a theme that has simmered since mid-year as rate-cut expectations firmed.

Fed cut odds rise as data blackout looms

Market-implied probabilities now lean toward a near-term Fed cut as the shutdown muddies the incoming data set and threatens to postpone official labor and inflation releases before the next policy meeting. Without nonfarm payrolls and other staples, investors are defaulting to high-frequency proxies to gauge momentum, keeping Fed cut odds and the dollar’s path unusually sensitive to headline risk.

FX tape: euro, yen and sterling advance

The euro and yen firmed against the dollar, aided by a shutdown-driven risk tone and regional policy currents, while sterling edged higher as traders looked through domestic soft spots and focused on U.S. developments. In Japan, improving business sentiment and a hawkish tilt from the BOJ helped the yen stabilize; in the UK, the pound’s 2025 gains remain notable despite mixed local data.

Context: from mid-year slide to today’s capitulation

For much of 2025, the greenback has struggled as markets questioned U.S. policy stability and penciled in easing. By late June, DXY was already tracking one of its worst years since 2003, the reference point behind the “worst annual drop in 22 years.” The shutdown reinforces that bearish frame, adding fiscal noise to an already fragile narrative around growth and policy independence.

Rates & cross-asset read-through

Treasury yields have wobbled as investors balance safe-haven bids against uncertainty over the pace and scale of Fed moves. A prolonged shutdown, especially one that delays multiple releases, could keep front-end volatility elevated and DXY heavy, while gold typically benefits as a portfolio hedge. Equity reaction has been uneven, with defensives and global earners tending to fare better on days when the dollar sinks.

What matters for the next leg

Duration of the shutdown: The longer the disruption, the deeper the information gap for the Fed and the market.
Proxy data quality: With official reports on hold, traders will over-weight private payrolls, card-spend, vacancy trackers and PMIs, heightening day-to-day swings.
Global policy divergence: If BOJ and ECB signaling leans less dovish than the Fed, relative-rate support for the dollar erodes further, keeping the worst annual drop in 22 years narrative alive.

Corporate & investor implications

Hedging: U.S. multinationals may enjoy translation tailwinds, but CFOs should revisit hedge ratios as DXY weakens into year-end; abrupt reversals can still bite if a political deal arrives.
Commodities: A softer dollar typically eases financial conditions for EM importers; however, idiosyncratic supply stories (oil products, metals) can dominate price action.
Credit: If shutdown uncertainty lingers, issuance windows may narrow and spreads drift wider at the margin, more relevant to lower-quality names.

Risk checks and counterpoints

Short squeezes remain a risk: any rapid budget agreement or upside surprise in alternative data could spark a dollar bounce, compressing Fed cut odds and challenging the consensus that the dollar sinks on policy turmoil. Equally, sharper U.S. growth disappointment would cut both ways, softening yields but also raising global risk aversion that can intermittently support the dollar via haven flows.