Democratic Congress poses a 'mildly bearish' risk for the Dollar

We see the outcome of the midterms as mildly bearish for the dollar, though not the instigator of a directional change. A Democratic Congress is likely to rein in Trump’s fiscally expansionary agenda, easing deficit concerns and taking some of the heat out of the Treasury sell-off.

Lower yields could narrow the US rate advantage, while calmer bond markets may sap safe-haven flows. That said, this is not a game changer, as with Trump’s veto intact and a two-thirds Senate majority unlikely to override it, Congress can block new spending but it cannot unwind what is already in place.

We also do not see a big impact on the bond market. Even with Congress changing hands, yields are unlikely to fall far while the Iran war drags on, the US economy stays solid and inflation expectations remain high.

Fed policy continues to matter far more for the dollar. There is an argument, in theory, that a Democratic Senate curbs Trump’s ability to install dovish Fed governors, though with few board seats set to open before the end of his term, the practical impact is small.

Once the dust settles from the election, investors will shift their focus back to economic data, notably Friday’s nonfarm payrolls report.