The Dollar concedes the Democrats’ victory

The loss of American exceptionalism will weaken the greenback.
A shift of capital to Europe and Asia will boost the euro and the Yen.

Alexander Kuptsikevich FxPro

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.

Summary: The Democrats’ victory weakens the dollar: fading American exceptionalism, debt-ceiling risks and lower Treasury yields will support the euro and the yen.

Author

Alexander Kuptsikevich

FxPro

Alexander Kuptsikevich, a senior market analyst at FxPro, has been with the company since its foundation. From time to time, he gives commentaries on radio and television. He publishes in major economic and socio-political media.

AUD/USD flatlines near 0.6965 as less hawkish RBA counters USD weakness

AUD/USD holds steady above a two-week low, trading near 0.6965 in the Asian session on Wednesday as early midterm election results heighten political uncertainty and weigh heavily on the US Dollar. Moreover, reviving safe-haven demand triggers a fresh leg down in US bond yields, offsetting Fed hike bets and exerting additional pressure on the buck. However, a less hawkish RBA caps the Aussie.

USD/JPY declines below 158.00 as USD weakens on midterm election results

USD/JPY comes under heavy selling pressure on Wednesday, dropping below 158.00 during the Asian session as the US Dollar slumps to a one-month low amid heightened political uncertainty after early US midterm vote counts. Moreover, the prospect of gridlock in Washington drives safe-haven flows, triggering a fresh leg down in US bond yields and further weighing on the buck.

Gold continues scaling new weekly highs; eyes $4,050 as US sticks to elections-led losses

Gold builds on its strong intraday move up, hitting a series of new weekly tops, and climbing back close to the $4,050 level during the first half of the European session amid a broadly weaker US Dollar. Democrats’ wins in the House and Senate raise the prospect of gridlock in Washington. Moreover, heightened political uncertainty drove investors to safe-haven assets, exerting some downward pressure on US bond yields. This is seen weighing on the Greenback and supporting the precious metal.

Crypto Today: Bitcoin, Ethereum, XRP extend advance as US Dollar slides on Democrats' US midterm victory

Bitcoin trades above $78,000 on Wednesday as risk-on sentiment improves in the broader cryptocurrency market. Ethereum mirrors BTC’s recovery outlook, hovering above $2,300. Ripple similarly exchanges hands above $1.28, marking two consecutive days of gains.

ADP Employment Report expected to show slower job growth in October

The Automatic Data Processing Research Institute is due to release October’s private-sector employment report on Wednesday. The market consensus anticipates a moderate slowdown in job creation, with the ADP Employment Change expected to show 69K new private jobs in October, down from 90K in September.

The 2% inflation target came from a throwaway remark. It now moves trillions

The Federal Reserve's 2% inflation goal grew out of an off-the-cuff remark by a New Zealand politician in 1988. Bond investors still price long-term US debt as if 2% holds, so a change in how the Fed measures inflation would move markets.