Scenario 1: Republicans hold the Senate and Democrats gain the House
At the moment, Republicans currently control both houses of Congress. Experts believe that the most likely scenario is that they will lose the House but retain the Senate. This is partly because fewer seats are up for grabs in the Senate and they are generally considered safer, particularly for incumbents. The combination of dissatisfaction with President Trump’s presidency and a dynamic new cohort of candidates for the Democrats could see them take control of the House. Based on precedent, the dollar is likely to be weakened if the Democrats do succeed. This is because they are likely to frustrate many current policies relating to trade and taxation.
Scenario 2: Blue wave takes over Senate and House
Victory for the Democrats in both houses of Congress is currently seen as unlikely – but not impossible. There are a few ‘wild card’ factors at play this year, including high rates of dissatisfaction with the Republican president, more than usual numbers of key Republican politicians retiring or moving to a new office and losing the incumbent advantage, the emotive and polarising appointment of Brett Kavanaugh to the Supreme Court and more than usual numbers of younger voters, who generally skew Democrat. In addition, there are many more female and minority candidates, which may attract new voters not previously engaged with the system to the polls.
It’s not clear whether all these factors will all come together for a total wipe out of Republican majorities but if they do, investor sentiment and stock prices might take a hit and this will impact the US dollar. If the Democrats hold both houses, they can transform President Trump into what is known as a “lame duck” president, unable to pass any new reforms or proceed with his plans relating to healthcare, taxes or the infamous wall with Mexico. However, this will leave President Trump with one area within the remit of presidential authority – the trade war with China, which is outside Congressional approval. While the dollar is enjoying a period of strength that is due, in part, to the trade war, it’s unclear if that trend to continue indefinitely.
Scenario 3: Republicans keep hold of both houses
Most experts are braced for some change and the discussion is around the nature and extent of that change. However, there is always the chance that the Republicans will be able to retain both Houses and things will continue much the same. However, there are many issues likely to come to a head if President Trump continues on his current course. In the short term, the US dollar may benefit but longer term, there may be repercussions and the possibility of a bubble being created if the president remains unchecked.
What next for the dollar?
Some analysts believe that voters will deliver a reckoning to President Trump and others that the Republicans are unbeatable – most seem to be hedging their bets and expect Republicans to keep the Senate and lose the House to the Democrats. This seems the most likely based on the current situation and historical precedent. Whatever the future may hold politically, other factors including the trade war, current economic policy and US economic performance are working in the dollar’s favour – but the uncertainty will exert some pressure and may cause volatility in the run up to the 6th November.