The U.S. Dollar is Tipped for Gains after Washington Deal to Avoid Government Shutdown

© Gage Skidmore

- USD buoyed by deal averting second government shutdown.

- USD tipped to rise further as threat of growth headwind removed. 

- But progress in trade war could lift rest of world, turn tables on USD.

The Dollar rose Tuesday and was tipped to remain supported after lawmakers in Washington struck a deal that is expected to avert a second U.S. government shutdown from happening in just as many months this weekend. 

President Donald Trump has secured partial funding for his proposed wall along the border with Mexico and it's now hoped he will sign a bill to fund the federal government beyond the weekend, averting the need for it to close. 

"US lawmakers have reached a tentative border security deal in an attempt to avert another government shutdown," says Lee Hardman, a currency analyst at MUFG. "This has raised hopes that Congress could pass a spending bill – if President Trump approves it – before the Friday deadline. If so, this should prove supportive for the dollar."

The deal will provide around $1.38 billion of funding for the border wall, which is only around 20% of the total required to complete it and so could be seen as a win by the opposition, although the White House also scored a win when the Democratic Party agreed to drop an effort to limit the number of "beds" available for detained migrants.

Tuesday's agreement comes closely behind the longest government shutdown in history, which ended in late January after an apparent capitulation by President Trump, who had allowed the government to close after opposition lawmakers refused to support a spending bill that contained funding for the wall. 

The Congressional Budget Office estimates the first shutdown cost the economy around 0.5% of GDP in lost growth, given federal workers were furloughed and went unpaid for the best part of a month, hitting businesses that trade with federal agencies or rely on spending from government workers.

That is why avoiding another shutdown has been positive for the Dollar. Demand for the greenback had been tempered in recent weeks by Washington politics, which have clouded the outlook for the economy at a time when risks to growth coming from overseas were already threatening the Federal Reserve (Fed) interest rate outlook.

The Fed said in January it will be slower to raise rates this year because it wants time to observe future developments in the global economy, given a slowdown overseas could easily undermine U.S. growth and inflation prospects.

Above: U.S. Dollar index shown at daily intervals.

The Dollar index was quoted 0.07 higher at 97.12 during the morning session Tuesday and is now up 1.14% for 2019, while the Pound-to-Dollar rate was -0.09% lower at 1.2852 but has risen 0.89% this year. 

The Euro-to-Dollar rate was -0.05% lower at 1.1272 and has declined -1.6% this year. The greenback was higher against most G10 currencies during the morning session Tuesday. 

Above: Pound-to-Dollar rate shown at daily intervals.

"USD/CNH is lower, and that's a good sign of risk sentiment. NOK, AUD and CAD all have a good chance of beating EUR, GBP and USD," says Kit Juckes, chief FX strategist at Societe Generale. "I don't think the dollar will do well in 2019 but being bearish has to mean being bullish of something and there's not much to like."

The White House is also keen to meet Chinese President Xi Jingping, adviser Kellyanne Conway told Fox News Monday, ahead of a March 01 deadline that will see U.S. tariffs on around $200 bn of imports from China more than double to 25% if a deal addressing "unfair trading practices" isn't reached by then. 

President Trump had said last week there are no plans to meet Jingping ahead of March 01, leading markets to speculate the talks may have been falling apart just as the deadline nears. 

Negotiators have been in talks aimed at ending the trade war between the world's two largest economies since early December after Trump threatened to target all of China's annual exports to the U.S. with tariffs and to raise the levies already charged on some of its goods trade. 

"It appears increasingly likely that the deadline will be extended and that tariffs will not increase initially. This should drive positive broader risk sentiment and, as we’ve argued previously, prove somewhat negative for the US dollar," says MUFG's Hardman.

Data emerging from China and the Eurozone began pointing last year to a slowdown in both economies, with manufacturing industries and the trade war being at the forefront of the downturn. 

China's central bank and policymakers have already attempted several times to support the economy with various forms of stimulus as a result, while the European Central Bank (ECB) has hinted strongly that it could now delay the date at which it lifts interest rates from their crisis-era lows.  

This has supported the Dollar so far because weaker growth is undermining the outlook for interest rates elsewhere in the world at a time when superior U.S. growth has already enabled the Federal Reserve to lift its own rate far above those of other developed world central banks.

Any deal ending the trade war would be a lifeline for China and the Eurozone, potentially leading to a pick up in growth and enabling both central banks to think again about raising rates, which would be bad for the Dollar. 

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