Strategy & Operations » Governance » US dollar falls as government shuts up shop

SO it’s actually happened…the US government has shutdown for first time in 17 years.

A stalemate was reached among stubborn US politicians and this has forced the government into a partial shutdown, causing some distress for the US dollar across the board in the foreign exchange markets. President Obama will now have to stop non-essential services, jeopardising just under one million US jobs and forcing many workers onto unpaid leave.

The main disagreement in the budget talks was due to the infamous ‘Obamacare’ policy, which has caused a lot of flare ups since its inception in 2010.

If the shutdown continues to drag out it could have a damaging effect on the US economy and its general growth. In real terms, analysts are forecasting that 0.3% could be shaven of the third quarter GDP figure every week that the political turmoil continues. This would obviously have a negative impact on the US dollar.

This issue has already resulted in a fall in the US currency, with the Dollar Index initially moving quickly lower by 0.5% as the news broke. Allied with the no tapering announcement from the Federal Reserve last month, it has been a harsh couple of weeks for the dollar with the USD index falling 1.5%. If the parties finally come to an agreement this should provide some relief for the greenback but there is no indication as to when this might come.

What this means for the US going forward is that the country now has a looming deadline of 17 October before pushing the United States into a default on its debts – which would be an absolute catastrophe and cause a global financial turbulence. We have already seen this “cliff” approached in January this year and the impact on the currency markets was profound.

UK importers and exporters will have to navigate this potentially volatile situation with caution – especially as we approach the time of year when many businesses will be working out budgets for 2014. While markets as a whole continue to expect the dollar to recover, conviction is dwindling. Charts this morning suggest that we are in a new trading range and the outlook got the GBP/USD and EUR/USD crosses in particular are unclear.

Sensible hedging policies will win the day.

Ikenna Chigbo is a currency consultant at Global Reach Partners