A federal government shutdown might not dent the dollar too badly, especially if it's short. But when the debt-ceiling debate rolls around, watch out.
Congress and the President aren't sharing their sandbox very well. A government shutdown is looking increasingly likely this Friday, with all the attendant uncertainties. What should you do if you are long the dollar, which is being hit today partly by worries about a shutdown?
You might do well to just sit tight, the experts say.
"Markets have gotten used to stopgap spending measures and have gotten a bit tired of these political games," said Paresh Upadhyaya, head of Americas G10 FX strategy at Bank of America Merrill Lynch. "If we get a government shutdown and it lasts beyond the last time, I think the markets may start becoming concerned. But for now, I'm not all that bothered by it," he told me.
Kathy Lien of Global Forex Trading looked back to the dollar's performance in 1995, when the government shut down twice. The first time, the dollar barely budged against the euro or the yen, she said. And when the government shut down again a month later, the dollar actually rose against the yen, she told clients in a research note. "Any shutdown is expected to be so temporary that it will pose no risk to the U.S. sovereign debt rating," she wrote.
If there is a shutdown, investors could actually watch it for clues to how Washington will handle the looming debate on raising the debt ceiling. Any turmoil around government debt limits could have a marked effect on the dollar, said Steven Englander, head of G10 currency strategy at Citigroup.
"You can shut down the government without defaulting. That just leaves you in despair about the process," he told me. But "If you do anything that looks like a default, that's really terrible for the dollar."
Shutdown or no, Englander sees few reasons to be holding the dollar now, short of a global catastrophe that would lead investors to rush to safe havens.
Apart from relatively slow economic growth that will do little for the dollar, "There are a lot of dollars out there," Englander pointed out. With dollars accounting for about two-thirds of global reserves, "That's more than anyone wants. Basically, investors are looking for opportunities to sell."
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