America chooses and the dollar takes a hit

Politically, the United States is quite divided. This is favorable for the shares, but less favorable for the price development of the dollar.

The midterm elections in the United States indicate that it will be more difficult for President Donald Trump to get his way in the next 2 years. His party loses majority in the House of Representatives. They must (just like the Senate) give the green light for new laws. Republicans still hold a majority in the Senate.

Relief
Trump is less likely to implement his plans to increase infrastructure investment and cut taxes for the middle class. While those measures in themselves are beneficial for economic growth, investors reacted anyway relieved on the election results.

This is mainly due to the fact that the US economy is already growing strongly. As a result, fears of overheating the economy have steadily increased in recent times. In that scenario, the US central bank (the Fed) has to raise interest rates quickly in order to keep inflation in check.

Interest rate scenario can go in the trash
A sharp rise in interest rates is unfavorable for the stock market. Why invest your money in stocks if you also get a nice return on your savings? The victory of the Democrats in the House of Representatives puts this scenario in the trash for the time being. That's bad news for the dollar.

The prospect of higher interest rates would have made it more attractive for several parties to hold their assets in the US currency. In foreign exchange markets, the euro-dollar exchange rate fell by almost 1% to its lowest level in more than 2 weeks.

Trump under fire
Although President Donald Trump now has less room to steer his political course, he still has plenty of room to make or break the mood in the financial markets. There is a message for that Twitter about the trade war, for example, is often enough.

It could just be that Trump will increasingly seek confrontation on an international level, the more he is under attack in his own country. High-ranking Democrats plan to investigate whether there is a conflict of interest, because Trump has not distanced himself sufficiently from his business interests.

wild ride
After the midterm election, Republicans will no longer be able to block requests to subpoena witnesses and request documents. It seems that the volatility in the financial and currency markets will only increase in the aftermath of the elections.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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