**US Dollar Index Strengthens as Shutdown Resolution Hopes Boost Sentiment**
*By Anil Panchal, Originally published on FXStreet*
The US Dollar Index (DXY), which measures the greenback’s performance against a basket of six major currencies, pushed higher in Asian trading on Friday, November 10, 2023. Optimism surrounding a potential resolution to the US government shutdown standoff lifted the American currency, reflecting investors’ cautious optimism in a complicated macroeconomic environment.
As the week closed, the DXY moved past the 99.50 mark, hinting at a broader recovery from previous dips fueled by rising Treasury yields, geopolitical uncertainty, and soft economic data. Traders, closely monitoring developments in Washington and the economic outlook, saw renewed support for the US dollar amid expectations that a shutdown could be averted.
## Key Highlights
– The US Dollar Index recovered above 99.50 during the Asian session on Friday.
– Hopes that US lawmakers may reach a compromise to avoid a government shutdown improved market sentiment.
– Treasury yields fluctuated but lent underlying support to the dollar amid global risk aversion.
– Mixed economic signals from recent US data releases kept expectations uncertain regarding the Federal Reserve’s next moves.
– Broader macroeconomic narratives such as China’s recovery, global inflation, and monetary divergence also influenced DXY performance.
## US Government Shutdown Risks Remain, but Optimism Rising
Investors were relieved to see signs pointing toward an end to the government funding gridlock that threatened to partially shut down federal agencies. A shutdown would impact a range of areas including national parks, federal financial support services, and government-backed economic reporting, with potential consequences for economic activity and GDP growth.
As of Friday morning, both Democratic and Republican leaders signaled increasing willingness to negotiate stopgap funding measures to keep the government operational past the November 17 deadline. This willingness bolstered risk appetite in markets, even as some uncertainty lingers about whether enough time remains to pass necessary legislation.
### Averting a Government Shutdown Could:
– Sustain federal spending, avoiding negative economic ripple effects.
– Keep US economic data releases on schedule, which are critical for Federal Reserve policy decisions.
– Support domestic equity markets, which in turn can add to USD stability.
– Strengthen consumer and business sentiment, reducing volatility.
Rumors of a bipartisan agreement gaining traction were enough to lift the dollar on Friday, especially as traders unwound some of their safe-haven flows into alternative assets like gold and the Japanese yen.
## Treasury Yields and the Fed’s Policy Path
The dollar’s advance came alongside modest upticks in US Treasury yields. The 10-year Treasury yield hovered around the 4.6% mark, up from earlier lows in the week. Although yields have moderated from October peaks, steady rises continue to reflect cautious expectations that inflation pressures may not recede as quickly as hoped.
Strong labor market data and service-sector figures released earlier in the month have buoyed this concern, giving the Federal Reserve room to maintain a hawkish policy stance if inflation persists beyond comfort levels.
### Market Participants Consider Key Fed Factors:
– Strong job market: October’s nonfarm payroll increase of 150,000 hinted at resilience.
– Sticky inflation: The Core PCE price index remains above the Fed’s 2% target.
– Balanced risk communication: Fed Chair Jerome Powell has emphasized data dependency, neither ruling out rate hikes nor prematurely suggesting cuts.
While the Fed kept rates steady at its November meeting in line with expectations, Chair Powell maintained that policy could tighten further if necessary. He highlighted that risks remain tilted toward inflation and cautioned that high rates would likely persist longer than markets anticipated earlier this year.
For the dollar, any sign that the Fed is not done tightening would likely act as a tailwind, given the interest rate differential between the US and other major economies.
## Economic Data Supports Moderate Optimism
The dollar has also found moderate support through a batch of recent economic indicators. A mix of resilience in several
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