The US dollar fell against most major currencies on Wednesday as early results from the US midterm elections pointed to significant gains for the Democratic Party, prompting investors to reassess the outlook for fiscal policy, growth and American assets. The dollar index, which tracks the greenback against six major peers, slipped about 0.3% to around 101.4 during Asian trading, according to Reuters.
The euro rose roughly 0.4% to about $1.124 and sterling gained a similar amount to near $1.346, while the Japanese yen firmed to around 157.6 per dollar. The moves came as US stock futures fell sharply, led by technology shares, and investors shifted money into US Treasuries.
The reaction matters for global markets because the composition of Congress will shape spending, taxation and regulation for the remainder of President Donald Trump’s term. A divided government would make major fiscal measures harder to pass, which some strategists see as a drag on US growth expectations and, by extension, on the dollar.
Key Takeaways
- The dollar index fell about 0.3% to around 101.4 as early midterm results favoured the Democrats.
- The euro climbed to about $1.124 and sterling to near $1.346, while the yen also strengthened.
- Democrats picked up a Republican-held Senate seat in North Carolina and held Georgia, but Senate control remained uncertain.
- Traders are also positioning for a Bank of England policy decision on Thursday, with several major banks forecasting a rate rise.
Early Results Favour the Democrats
Former North Carolina governor Roy Cooper won the state’s Senate race against Trump-backed Republican Michael Whatley, flipping a Republican-held seat, according to Reuters. Senator Jon Ossoff also secured re-election in Georgia, one of the first significant races to be called after polls closed.
Democrats need a net gain of four seats to win control of the Senate and are widely seen as favourites to take the House of Representatives. At least nine Senate contests were considered competitive heading into election night, leaving the final balance of power uncertain as counting continued.
Prediction markets moved towards a Democratic sweep of both chambers as results came in, Reuters reported. Such an outcome would give the opposition considerable power to block or reshape the administration’s legislative agenda.
Fiscal Outlook Drives Currency Moves
Currency strategists linked the dollar’s decline to expectations of tighter constraints on government spending. Carol Kong, a currency strategist at Commonwealth Bank of Australia, told Reuters that the dollar could weaken further if Democrats take both chambers, since a sweep would limit the scope for additional fiscal expansion.
Moh Siong Sim, a currency strategist at OCBC, said the market reaction was consistent with concerns that a Democratic Congress could increase scrutiny of the artificial intelligence sector, weighing on the Nasdaq and on growth expectations. He added, however, that it is “still difficult to pass legislation at the federal level” given the president’s veto power.
Not all analysts expect the move to persist. Chris Weston, head of research at Pepperstone, said the size of any Democratic majority would be critical for traders, adding that “a narrow blue wave may be largely priced in.” Charu Chanana, chief investment strategist at Saxo, noted that lower Treasury yields could eventually offer some relief to risk assets.
The dollar’s slide reverses part of the strength seen earlier in the week, when the euro fell amid French political turmoil as the US dollar strengthened on a rebound in equities.
Central Banks and Oil in Focus
Sterling traders are also looking ahead to the Bank of England’s policy announcement on Thursday. Several major banks, including Goldman Sachs and JPMorgan, have forecast a rate increase at the November meeting as policymakers respond to persistent inflation pressures. A hike would mark the first increase in UK borrowing costs since August 2023.
The prospect of tighter policy in the UK follows a similar move in Australia, where the Reserve Bank of Australia raised rates to an 18-year high earlier this week, underlining a broader shift among some central banks towards tightening. Previous episodes of dollar weakness have often coincided with sterling strengthening against a softer US currency, and Thursday’s decision could reinforce that dynamic.
Oil prices were volatile after falling to a four-week low in the previous session, as investors weighed diplomatic efforts in the Middle East and Ukraine against the risk of supply disruption. Strategists have noted that any renewed escalation in the Middle East could push crude prices higher and revive safe-haven demand for the dollar.
Looking ahead, currency markets are likely to remain sensitive to the final midterm tallies, particularly the outcome of the closest Senate races, which may take days to confirm. Investors will also watch Thursday’s Bank of England decision and upcoming US economic data for signals on whether the dollar’s post-election weakness marks the start of a broader trend or a short-lived adjustment.
