The performance of the US dollar and US Treasuries over the next several days will likely depend on developments in the looming government shutdown situation.

These ongoing tensions are caused by disagreements between Republicans and Democrats over how to spend the Federal budget and certain Republican lawmakers’ desire to limit government spending.

This morning, the Dollar Index and US Treasuries fell on news that late night talks yesterday among Republican and Democratic lawmakers failed to produce a compromise on the federal budget. With the deadline looming just two days away (Friday night), the markets are concerned about a government shutdown.

A government shutdown simply means that the non-essential functions of the federal government will receive no funding and thus stop functioning – until a federal budget is finally agreed upon.

While this temporarily shutdown sounds like a transitory and symbolic problem, the market takes it pretty seriously.

DBS Group Research stated: “A government shutdown will heighten uncertainties over the federal debt limit which is expected to be hit this month or next. Foreign investor confidence in the US dollar will be hurt if US lawmakers fail to raise the federal debt limit.”

The federal government has a debt limit. The current one is about to be breached in May. If the debt ceiling isn’t raised, the US government may default on its debt, which is something much more serious than a temporary government shutdown.

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