With the record-long U.S. government shutdown concluded, Bank of America warns that a flood of backlogged economic data—accumulated over 43 days—will be released within the next three weeks, likely reigniting volatility in currency markets.
Strategists Adarsh Sinha and Janice Xue noted in a Thursday report that the dollar's sensitivity to global interest rates has climbed to its highest level since Q1 this year, citing the correlation between the ICE Dollar Index and the two-year Treasury yield spread. This suggests renewed U.S. data releases could trigger dollar fluctuations as markets reassess interest-rate divergence between the U.S. and major economies. Forex traders typically favor higher-yielding currencies.
"Resumed data flows may lift U.S. rate-spread volatility from recent lows," the strategists wrote. "This makes post-shutdown U.S. data particularly pivotal."
Currency volatility gauges have slumped in recent months as investors cautiously weighed global trade tensions and central bank policy trajectories. BofA attributes part of the FX market calm to narrowing yield spreads, as central banks like the ECB near the end of easing cycles. The prolonged shutdown further clouded the outlook for the world's most-traded currency by delaying critical indicators.
"Without data to confirm economic resilience, the dollar has shifted to tracking growth rather than inflation—despite Fed Chair Powell's stance," said forex strategist Brendan Fagan. "Right now, the dollar is sending clearer signals than rates."
The dollar spot index fell for the sixth time in seven sessions Thursday, extending this year's decline. BofA noted investor positioning has turned neutral on the dollar versus October's bearish extremes, but with stark divergences among G10 currencies. Flow data shows sterling held "extremely short" positions ahead of the UK budget, while traders crowded into long yen bets despite persistent weakness.
