Blue wave proves 'modestly bearish' for the Dollar

The emphatic blue wave in the US midterms proved modestly bearish for the dollar on Wednesday, as we had anticipated. The moves in the greenback were contained, however, as the outcome was expected and political paralysis in Congress is likely to limit any meaningful change in fiscal policy.

Looking beyond the fiscal implications, two second-order effects now appear to be emerging: heightened Democratic scrutiny of AI, which could weigh on tech stocks, and growing congressional pressure for a faster de-escalation of the Iran conflict, which may ease safe-haven demand.

"The first has already been visible, with US equities falling sharply on Thursday, led by the tech sector. If this risk-off move extends, the dollar could catch a bid on safe-haven demand.

The Iran impact of the midterms also warrants a closer look. Our view in the early days of the conflict was that fears of a heavy defeat in the midterms could accelerate the process towards a peace deal.

As it turns out, it may be that the realisation of a blue wave, rather than the anticipation of one, is what finally forces the administration’s hand. Market participants will be hoping it’s a case of better late than never, and certainly the drop in Brent crude in the past couple of days suggests that investors are more hopeful than they once were.

Clearly this would be bearish for the dollar, so with tech-driven risk aversion possibly pulling the other way, the direction of travel for the greenback is far from clear.