- The loss of American exceptionalism will weaken the greenback.
- A shift of capital to Europe and Asia will boost the euro and the yen.
The US stock market fell to five-week lows following the initial results of the US midterm elections. EURUSD tested the upper boundary of the 1.11–1.125 consolidation range, while the Japanese yen and the Swiss franc were the main beneficiaries of the blue wave.
Although the count is still ongoing (results for two senators and 77 representatives have yet to be announced), the Democrats have already secured a majority in both the Senate and the House of Representatives. The initial negative reaction in equity markets is more likely due to the typical nervousness associated with a shift in the political alignment of the majority of legislators. Furthermore, for the US dollar, the ‘blue wave’ is clearly negative in several respects.
The USD index reached an almost 18-month high in October thanks to American exceptionalism. The US economy was growing faster than its peers, shares were being snapped up due to high demand for artificial intelligence technology, and Treasury bonds were in demand for their higher yields compared with bonds of other major economies.
A potential deadlock over the debt ceiling, with a Democrat-controlled Congress, carries the risk of a government shutdown and a slowdown in US GDP growth. At the same time, tighter regulation of artificial intelligence technologies and issues with data centres will slow down a key component of economic growth, investment in AI. In addition, we can expect greater resistance to the President’s foreign policy initiatives, including tariffs.
The likelihood that lawmakers will launch impeachment proceedings against Donald Trump has risen sharply to 70%, undermining confidence in the dollar. As a result, EURUSD took off, while USDJPY lost nearly 1% within a few hours. However, both currency pairs typically rise during periods of strong upward momentum in equities; consequently, the recent rally in equities has allowed USDJPY to recoup some of its losses, as EURUSD has continued to move towards new highs.
The fall in Treasury bond yields will not be driven solely by a slowdown in GDP and a slump in stock indices. The Democrats will oppose Donald Trump’s plans to cut taxes and increase government spending. This will lead to lower Treasury issuance volumes, eroding the dollar’s recent advantage.
American dissatisfaction with the conflict in the Middle East will accelerate the peace negotiation process. A reduction in geopolitical risks, amid a recovery in oil exports from the region, will lead to a fall in Brent prices. The eurozone and Japan, as net importers of energy commodities, will benefit, as will their currencies, the euro and the yen.
The FxPro Analyst Team