Data on housing, durable goods, and revisions to the second quarter gross domestic product, meanwhile, came out higher than forecast

International News via Reuters:

The dollar eased against major currencies such as the euro and yen on Monday following a rally last week in the wake of a slew of stronger-than-expected U.S. economic data and ahead of a key nonfarm payrolls report that could offer further clues on the Federal Reserve’s policy path.

Data on housing, durable goods, and revisions to the second quarter gross domestic product, meanwhile, came out higher than forecast. In addition, U.S. jobless claims fell sharply. The economic reports prompted a pullback in expectations for Fed interest rate cuts. 

The greenback’s retreat also came amid the risk of a government shutdown, with funding due to expire at midnight on Tuesday. President Donald Trump will convene a meeting with congressional leaders at the White House on Monday in a last-ditch attempt to end the standoff.

“Traders are largely ignoring the risk of a government shutdown, and are instead fading last week’s dollar rally in anticipation of some softer labor market data releases in the days ahead,” said Karl Schamotta, chief market strategist, at Corpay in Toronto.

“Yields are ratcheting lower off last week’s highs, and bets on Fed easing are coming back a bit on the margins. This is supporting broader risk appetite and contributing to outperformance in the high-beta currencies against the dollar.”

Traders are currently pricing in 42 basis points of Fed easing by December and a total of 105 basis points by the end of 2026, about 25 bps less than levels seen in mid-September

In late morning trading, the dollar fell 0.6% to 148.585, after posting its best weekly gain of more than 1% since early July.

The dollar index – a measure of its value relative to a basket of foreign currencies – was down 0.2% on Monday to 97.90, having risen 0.5% last week.

The euro, the largest component in the dollar index, rose 0.3% versus the U.S. unit to $1.1734.

Top of investors’ minds was a looming U.S. government shutdown should Congress fail to pass a funding bill before the fiscal year ends on Tuesday. Without passage of funding legislation, parts of the government would close on Wednesday, the first day of its 2026 fiscal year.

Analysts say the dollar typically weakens ahead of such episodes, before rebounding once the funding dispute is resolved. Markets are likely to see it as a fresh headwind for an already sluggish labour market.

A shutdown would have implications for the release of Friday’s closely-watched non-farm payrolls report, as well as subsequent economic data, which may not be published.

Ahead of Friday’s jobs report, investors will also get figures on job openings, private payrolls and the ISM manufacturing PMI, among others.

“The shift in the Fed’s reaction function away from inflation concerns toward defence of the labor market, which leads to faster and earlier rate cuts and lower real rates but at the expense of higher-than-expected inflation, suggests we will remain in the U.S. dollar bear regime for longer,” said David S. Adams, head of G10 forex strategy at Morgan Stanley.

LEGAL BATTLE OVER FED GOVERNOR COOK

Investors are also closely watching the legal battle over Federal Reserve Governor Lisa Cook’s potential removal, as any threat to the Fed’s independence poses a far greater risk to the dollar than the government shutdown.

The Trump administration has asked the U.S. Supreme Court to allow President Donald Trump to fire Cook, arguing that her removal would be a lawful exercise of presidential authority.

In other currency pairs, the dollar slipped 0.1% to 0.7976 franc while sterling gained 0.2% to $1.3424

Analysts expect inflation data from euro zone countries to have little impact on the rate outlook or the single currency, as investors expect policy to remain stable. Spain’s European Union-harmonised 12-month inflation rate rose to 3.0% in September.

Analysts’ attention remained on the war in Ukraine and the potential for increased military spending.

In Japan, the diverging outlook for rates between the Fed and the Bank of Japan will remain in focus amid signs of a hawkish shift on the BOJ board.

In other currencies, the Aussie was last 0.3% higher at US$0.6565. The Reserve Bank of Australia announces its rate decision on Tuesday. Expectations are for the central bank to stand pat on rates.

Reporting by Gertrude Chavez-Dreyfuss in New York and Stefano Rebaudo in Milan ; Editing by Shri Navaratnam and Jamie Freed