Top FX Forecaster Says Fed Remarks Key for Dollar Amid Shutdown

(Bloomberg) -- The dollar will likely weaken further as the US government shutdown drags into a second day, according to a top foreign-exchange currency forecaster.

The political impasse in Washington has already caused a delay in the release of Thursday’s weekly jobless claims and could postpone the latest monthly payrolls report that was scheduled to come out Friday. Absent economic data, words uttered by monetary policymakers will give traders clues on the Federal Reserve’s interest-rate path, said Jason Schenker, president at Prestige Economics. 

“A shutdown compounds near-term downside risks for the greenback,” said Schenker in an interview. He topped Bloomberg’s ranking of FX prognosticators for a second quarter in a row. 

So far this year, a Bloomberg gauge for the dollar dropped more than 8% and Schenker expects the greenback to fall further. The index edged higher on Thursday after four days of declines.

“With the shutdown impacting data releases, Fed remarks could become more critical for assessing the future of Fed policies,” he said. 

There will be no shortage of Fed speak in the coming weeks leading up to the late October policy meeting to help guide traders, who are so far betting that the Fed will continue cutting rates this year to boost a softening labor market. 

On Thursday, Dallas Fed President Lorie Logan said that the central bank needs to be cautious on rate cuts as risks are rising for inflation expectations to climb, while Fed Governor Stephen Miran called for rapid cuts last week. Chicago Fed President Austan Goolsbee had said a lack of official data will make it harder for policymakers to interpret the economy.

That said, “once a shutdown is resolved, the dollar is likely to rebound,” but Schenker still expects “further dollar weakness on trend with the potential for leveling off next year.”

He forecasts the euro to rise to $1.19 by year-end from the current level of $1.17. Meanwhile, Schenker sees the yen strengthening to 145 per US dollar this year from about 147 on Thursday. 

“FX markets are vulnerable to big swings from domestic policy risks associated with the US shutdown,” he added.

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