The U.S. dollar was on the back foot on Tuesday in cautious trading as investors braced for a possible U.S. government shutdown that would halt economic data releases including the crucial jobs report later this week.

Government funding will expire at midnight on Tuesday unless Republicans and Democrats agree to a last-minute temporary spending deal, with President Donald Trump and his opponents making little progress at a White House meeting.

The payrolls report, crucial for decision-making by policymakers at the Federal Reserve, is scheduled for Friday, and a delay could leave the central bank flying blind on the labour market.

Federal Reserve Bank of New York President John Williams said on Monday that emerging signs of weakness in the labor market drove his support for cutting interest rates at the most recent central bank meeting.

"If a shutdown is brief, the Fed will largely ignore it," said Elias Haddad, senior markets strategist at Brown Brothers Harriman.

"However, a prolonged shutdown (more than two weeks), increases the downside risk to growth and raises the likelihood of a more accommodative Fed."

Traders are currently pricing in 42 basis points of Fed easing by December and a total of 104 basis points by the end of 2026, about 25 bps less than levels seen in mid-September.

That could put the dollar in a vulnerable position in the near term, with the broader U.S. currency index , which has dropped 9.7% this year, easing a bit to 97.948 in early Asian hours. The euro was flat at $1.17275, while sterling was at $1.3433.

"While a shutdown could delay Friday's non-farms payrolls report, historically, the impact on GDP has been modest, as any disruptions are typically made up immediately after the shutdown ends," said Tony Sycamore, market analyst at IG.

The Australian dollar was steady at $0.65795 ahead of the policy decision from the Reserve Bank of Australia later in the day, where it is widely expected to stand pat on rates.

After multiple rate cuts, economic growth picked up in the second quarter and the jobless rate has held relatively steady, suggesting the RBA can slow its pace of easing. This year, it cut rates in February, May and August.

Still, the Aussie has gained over 6% this year benefiting from a weaker U.S. dollar and strong risk appetite. For September, it has advanced a more modest 0.6% after hitting an 11-month high two weeks ago.

"The RBA is likely to steer away from providing guidance about cuts to the cash rate because tension is building between the RBA's two goals of inflation and full employment," said Carol Kong, currency strategist at Commonwealth Bank of Australia.

The Japanese yen was slightly weaker at 148.72 per U.S. dollar as investors considered the Bank of Japan's summary of opinions for its September policy meeting that showed the central bank debated the possibility of a near-term rate hike.

"Judging solely from the perspective of Japan's economic conditions, it may be time to consider raising the policy interest rate again, given that it has been more than six months since the last rate hike," one opinion was quoted as saying.

At its September meeting, the BOJ kept rates steady but faced dissents from two board members who voted for a rate hike. Traders are increasingly gearing up for the BOJ to hike interest rates again with a move in December priced in at a 60% chance.

Source: Reuters.com