Midterm elections: Changes at the top

Midterm elections: Changes at the top

Democrats win Congress and Republicans retain the Senate after midterm elections with historic turnout

The Democrat party has regained control of the House of Representatives for the first time in eight years, delivering a blow to President Trump. However, the Republicans have not only kept control of the upper house, but strengthened their grip on the Senate. A mixed bag of results and a further polarized landscape of politics suggests that changes are on the horizon that could impact the US dollar.

Disruption of policy

To date, President Trump has met little resistance to his plans, from tax policy to changes to healthcare. With the Democrats set to take charge of the lower chamber in two months, the president may need to take a more bi-partisan approach to policy. The presence of the Democrats in the House means that any future changes could be met with resistance, either in the form of watering down the more extreme proposals or rejecting them entirely. The dollar has been strong based on the Republican approach to taxation and business, but if this changes then it may have an impact. 

Political jeopardy

There have been rumblings of impeachment almost since the day President Trump was elected. To date, despite the investigation into collusion with Russia and demands for Donald Trump to release his tax returns, there has been no action because the Republicans have held control over Congress and would not initiate proceedings. It’s likely that any action will wait until the results of the investigation have been released but prior to the changes to the affiliation of elected officials, it was not guaranteed that any action would be taken. Although nothing can be certain until the reports are released, the increased possibility of impeachment adds more uncertainty, which could impact the dollar. Actual impeachment would also be likely to have a significant effect on the currency.

Changes to trade

The tariffs imposed on China and resulting trade war remain in the hands of the President. While Congress may be able to effectively block some of the Republican proposals, including the controversial border wall with Mexico, there is no scope to stop the trade war from Congress. To date, the trade war appears to have been good for the dollar, but projections for a long term dispute are not all positive. There are already signs that the trade war is having a less than positive effect, such as the excess stocks of soy beans which farmers are unable to export due to retaliatory tariffs from China. Together with a change in the wind politically, Trump may be nudged into changing his approach to appease his supporter base in agricultural regions and this is increasingly important given that the Democrats now have a measure of power.

What happened to the dollar after the midterms?

The dollar took a dip after the midterm results came out. This is often the case at moments of political change, and the result was largely expected and priced into the market. There are some indications that the markets will not welcome the Democrats’ increase in power; politicians will now turn their attention to the White House and the 2020 elections and if there is an indications that the Democrats are growing in popularity, it may not be positive for the dollar. However, there is also the chance that more measured policies and less controversy, associated with the Democrats, may be good for greater stability in the US political picture and this in turn may assist the dollar. The market may have a period of volatility as the dust settles after the bitterly fought elections and there may be more fluctuations when the new representatives enter the House in two months and start to make their presence felt.

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