Sep 27, 2023
Prolonged US Shutdown to Bring Dollar Peak Closer, SocGen Says
Bloomberg News
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(Bloomberg) -- The dollar is poised for its longest streak of daily gains in a year, but Societe Generale SA’s Kit Juckes says a top could be in sight for the currency if a US government shutdown lasts for more than a week or two.
Congress has been unable to forge an agreement to avoid a partial shutdown on Oct. 1, which would cost federal contractors up to $1.9 billion daily in lost and delayed revenue, compounding worries around rising long-term interest rates and still-elevated inflation.
An extended closure will be “enough to derail the doom-loop of rising yields, rising dollar, still-OK economic data,” said Juckes, chief foreign-exchange strategist at Societe Generale in London.
It’s a scenario that he anticipates will spur a 3% drop in the Bloomberg Dollar Spot Index by the end of the year. The gauge rose for a sixth straight day Wednesday, touching the highest since December. The strength, fueled by Federal Reserve interest-rate hikes and the US economy’s outperformance versus major counterparts, is rippling through global markets and pushing officials in Asia to move to protect their currencies.
Read more: Your Questions Answered on US Government Shutdown: QuickTake
For Juckes, this would just mark the beginning of a slide in the dollar that he expects will gain steam in 2024 as the Fed pivots to rate cuts.
“The main dollar downturn comes when the dust settles, the US economic outlook is weaker, the Fed is heading to easier policy,” Juckes said. “That shift takes time, hence my central case is the dollar turns sometime in the first half of next year.”
Any haven demand in the wake of a shutdown would help the dollar only briefly, he said.
“The shutdown looks like it will make the dollar strong, but it’s actually going to make the dollar weak in the end, because the government will have to step away from fiscal largesse,” he said. “It’s fiscal policy that provided the money that has kept the US economy growing for longer than others.”
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