The Fed’s rate decision last week sent a shock to the system that has left the dollar stronger on the back of a somewhat shaky outlook. On the assumption that interest rates would rise in the next few months, the yield on US bonds rose. The dollar was supported by this as investors were expecting to get higher returns.
The future will determine whether or not this trend continues. One of the more pressing ones is the ongoing budget debate in the US Congress. Political standoffs have been increasing in frequency, contributing to Fitch’s recent downgrade. Rating agencies warned that further credit downgrades could be possible in the event of another government shut-down. Political acrimony at the time suggests that the likelihood of this happening is increasing.
The uncertainty piles up
The markets are uncertain about a government shut down, because the temporary reduction in spending can slow the economy. There is also uncertainty about the possible impact of any concessions made to reach a deal on spending. Generally, uncertainty is good for the dollar, since it’s considered a safe…