Dollar steadies amid U.S. government shutdown, political upheaval in Europe, Japan

Investing.com - The U.S. dollar steadied on Thursday, as investors eyed ongoing political upheaval in Europe and Japan against a prolonged federal government shutdown in Washington.

Attention in Europe, which had been partially focused on proposed European Union tariffs on steel imports during the previous session, was turning back to the ongoing political crisis in France.

French President Emmanuel Macron’s office said on Wednesday that he will appoint a new prime minister in the next 48 hours, following the resignation of premier Sebastien Lecornu earlier this week. Lecornu’s departure and the failure of his short-lived government, unveiled mere hours after he announced his cabinet line-up, has thrust Europe’s second-largest economy back into fresh political turmoil.

Although the chaos has raised speculation around possible a fresh snap parliamentary election, Macron’s office has said a majority of lawmakers were against such a move.

"It’s a domestic political and, probably soon, an economic crisis. Direct contagion to other eurozone countries looks unlikely. Indirect contagion, however, is possible," analysts at ING said.

Against this backdrop, the euro has come under some pressure, sliding by 0.1% versus the dollar to $1.1622. The single currency has fallen by around 0.8% over the past one-week period and slumped to its lowest level since the end of August on Wednesday.

Elsewhere, traders were still assessing the victory of Sanae Takaichi in the leadership contest of Japan’s ruling Liberal Democratic Party. Markets have been homing in on the possibility that Takaichi will back increased fiscal spending and looser monetary policy.

Speculation around potential upcoming policy tightening by the Bank of Japan has also been dampened. The central bank delivered its first rate hike in 17 years earlier in 2025, but policymakers have since signaled patience as economic momentum remains fragile.

"The recalibration of market expectations around a slower pace of Bank of Japan rate hikes continues to exert downward pressure on the yen, with spillover effects weighing on regional currencies," MUFG analysts said in a note.

The Japanese currency’s pair with the dollar was last trading at 152.67 yen, flirting with levels not seen since February. For the week, the yen has softened by more than 3.6% against the greenback.

Following the slip in the euro and the yen, the U.S. dollar index, which tracks the greenback against a basket of currency peers, was mostly unchanged at 98.94 by 05:28 ET (09:28 GMT). It had risen to a two-year high earlier in the session.

Traders were now keeping an eye on the now over week-long U.S. government shutdown, which has crucially led to the delayed release of key economic indicators that would likely factor into the Federal Reserve’s interest rate trajectory over the rest of 2025.

Minutes from the Federal Open Market Committee’s last meeting in September indicated that officials were divided over the path of rates, with much of the debate centering around balancing the twin risks of a slowing labor market and sticky inflationary pressures. Theoretically, a rate cut helps to spur on investment and hiring, albeit at the risk of reigniting price growth.

Most policymakers "judged that it likely would be appropriate to ease policy further over the remainder" of this year, although the exact timing and scope of the cuts remained a source of uncertainty, the minutes showed.

In a note, analysts at Capital Economics said the minutes confirmed that most FOMC participants backed bringing down rates to a more "neutral setting," or a level that neither aids nor hinders the wider economy, due to persistent "downside risks" to the employment picture.

"Nonetheless, with ’a majority of participants’ still emphasising the ’upside risks to their outlooks for inflation,’ we remain comfortable with our view that the FOMC will proceed at a slower pace than market pricing suggests," the analysts said.

Following the publication of the minutes, bets that the Fed will slash rates by a further 25 basis points at its upcoming meeting this month were intact.

(Ayushman Ojha contributed reporting.)