USD sees modest sell off after bruising night for Trump

Matthew Ryan, CFA Ebury

The dollar has sold off modestly after a bruising night for President Trump that has turned Congress emphatically blue. We see the result as mildly bearish for the greenback. 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 rate advantage that has propped up the dollar, while calmer bond markets may sap the safe-haven flows that have supported it in recent months.

That said, this is not a game changer for FX, not least as the outcome was largely priced in. Democrats can put a brake on Trump’s fiscal agenda, but with his veto intact and a two-thirds Senate majority unlikely to override it, Congress can block new spending but cannot unwind what is already in place. Yields are also unlikely to fall far while the Iran war drags on. 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. The real fiscal test will be the debt ceiling negotiations in 2027.

Author

Matthew Ryan, CFA

Ebury

Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

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