Dollar Rises to Strongest Levels in 2021 Despite Growing Concern Over Government Shutdown

An employee of the Korea Exchange Bank counts U.S. $100 notes during a photo opportunity at the bank's headquarters in Seoul, South Korea, on April 28, 2010. Jo Yong-Hak/Reuters

The dollar has risen to its strongest levels of the year against rival currencies, in spite of growing concern that the Federal Reserve will start to withdraw policy support and as Republicans continue to block Democrat efforts to raise the debt limit, threatening to plunge the government into a shutdown.

The dollar index—which measures the U.S. dollar relative to a basket of foreign currencies—rose to an 11-month high of 93.83 on Sept. 29.

The euro fell to $1.1660, its lowest level since November 2020, while the British pound dropped to $1.3514, its lowest level since January.

Earlier this week, the Bank of England warned that UK inflation could exceed 4 percent later this year, while two policymakers called for an early end to the central bank’s quantitative easing program due to rising price pressures.

Elsewhere, the yen, which is sensitive to U.S. yields, as higher rates can draw flows from Japan, touched an 18-month low of 111.34 per dollar.

The yen didn’t appear to show much of a reaction to the news that Fumio Kishida is set to become the next prime minister of Japan after he was elected as the leader of the country’s ruling Liberal Democratic Party (LDP), virtually ensuring his position.

The 64-year-old has called for a stimulus package of more than 30 trillion yen ($269 billion) to combat the pandemic.

MSCI’s broadest index of Asia–Pacific shares outside of Japan fell by 0.76 percent, with Australia off by 1.08 percent, and South Korea falling by 1.22 percent.

The Hong Kong benchmark was up by 0.67 percent, despite growing investor angst about China’s property company Evergrande collapsing and the country’s real estate clampdown. Chinese blue chips were 1.02 percent lower.

“We are expecting USD strength to continue for the remainder of the year ... and that’s just because of the outlook for policy tightening,” Kimberley Mundy, a strategist at the Commonwealth Bank of Australia, told Reuters, stating that there’s some potential for a hike in rates by late 2022.

U.S. Treasury yields have bounced higher in recent days, after the Fed hinted that it may taper the unprecedented support it has provided for the economy throughout the pandemic earlier than expected.

The Fed indicated that it may start raising its benchmark interest rate sometime in 2022 and it’s expected that it will begin cutting back on its monthly bond purchases before the year is over.

Traders are now focusing their attention on governments and central banks worldwide for signs as to when they'll pull back on the massive emergency packages they launched amid the COVID-19 pandemic.

Meanwhile, U.S. Senate Republicans on Sept. 28 blocked a bid by Democrats to raise the debt ceiling.

Federal funding is due to expire on Sept. 30 and borrowing authority is set to expire by around Oct. 18. Without an increase in the debt ceiling, the U.S. government will default for the first time in its history.

Reuters contributed to this report.