Even without a red wave, the dollar will have a hard time

The Republican Party's gains in the US midterm elections are smaller than expected. Still, the party could get in the way of President Joe Biden again next year. Together with better-than-expected inflation figures, this is another indication that dollar strength is declining.

The parcel boat will dock in Hellevoetsluis next Saturday. There is a good chance that Sinterklaas will already be out of the country before it becomes clear which party will get a majority in the US Senate next year. Georgia voters will go to the polls again on December 6. Despite a slim lead over his Republican challenger Herschel Walker, Raphael Warnock failed to get more than 50% of the vote this week. If he secures the win in the rematch, it looks like President Joe Biden's party will retain the razor-thin majority in the US Senate. That is a big boost, because a 'red wave' threatened to make it very difficult for Biden to chart its own course.

Divided Congress
The red wave refers to the party color of the Republicans. However, they managed to get a small majority in the House of Representatives. This makes it a lot more difficult for the Democratic party to get new laws through Congress. That's annoying for Biden, but for the rest of the world, a divided US Congress doesn't have to turn out so badly. Biden's huge investments in infrastructure and sustainability, among other things, have fueled economic growth considerably. An additional effect is that inflation has also been pushed up. And it is precisely this very high inflation that has prompted the Federal Reserve to raise the key rate sharply this year.

Fed steps on the brakes
The rapidly rising US interest rate made it attractive to hold more assets in dollars. The strength of the dollar sometimes caused quite a few problems in other countries. All imported products whose price is expressed in the US currency – such as oil and other commodities, among others – have also become considerably more expensive. The prospect that the loss of the House majority will allow Biden to step less on the economic accelerator, meaning the Federal Reserve may not need to brake as hard to contain inflation.

Euro over the dollar
If US interest rates do not rise as fast as they initially anticipated, a significant tailwind will disappear behind the dollar. This also happens when the tension in the financial markets subsides. In that regard, it is another good sign that US inflation is clearly cooling down. On Thursday it was announced that inflation in October stood at 7,7%. That's both a lot lower than last month's 8,2% and the roughly 8% economists had expected. After the inflation figures, the US currency again took a step back. As a result, the euro is worth a bit more than the dollar again – and it may just stay that way for the time being.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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