The dollar initially weathered the U.S. government shutdown. However, with the FAA now actively canceling flights, the negative GDP impact is becoming more tangible and less likely to be recovered quickly, increasing downside risk for the currency.

A shutdown doesn't just delay data reports; if it extends into mid-month, it prevents the government from conducting the surveys needed for future reports. This disrupts the entire data collection pipeline, causing a ripple effect that can obscure economic trends for months after the government reopens.

Political gridlock is portrayed as an intentional strategy. By creating a temporary economic downturn via a shutdown, the administration creates fiscal and monetary space to inject massive stimulus leading into midterm elections, timing the recovery for political gain.

While furloughed federal employees are typically guaranteed back pay after a shutdown, government contractors are often not. These individuals, who perform similar work without the same protections, face a permanent loss of income, highlighting a significant and often overlooked inequity in how shutdown risks are distributed.

Shutdowns pause the release of potentially bearish economic data and pressure the Fed to be more cautious, supporting liquidity. Markets now discount these events, seeing them as temporary political theater with a predictable resolution, unlike in the past when they caused fear and hedging.

The most significant danger of a prolonged government shutdown is the disruption to federal statistics. This creates an "unsettling" lack of visibility for policymakers, potentially causing them to miss a critical economic downturn and delay a necessary response. The direct GDP impact is often recoverable later.

The direct GDP impact from furloughed federal workers is small, mechanical, and quickly reversed. The more significant and lasting economic damage from a prolonged shutdown stems from its effect on the private sector, such as backlogged IPOs at the SEC or delayed construction projects waiting on permits.

The Federal Reserve is not 'flying blind' during government shutdowns that halt official statistics. It uses a composite of alternative indicators for the labor market and inflation, providing enough of a signal to stick to its pre-planned policy path, such as proceeding with scheduled interest rate cuts.

A recent White House memo indicates that employees in departments reliant on discretionary funding could be permanently dismissed, unlike typical shutdowns where workers are furloughed and retain jobs. This introduces a new, more severe labor market risk that could negatively impact the dollar.