US Midterms: What does this mean for the US dollar?

US Midterms: What does this mean for the US dollar?

You can’t have failed to notice that the US Midterms are coming up and tensions are running high.

For the US dollar, the event could be a significant turning point depending on the outcome. Since the start of Donald Trump’s unpredictable presidency, the dollar has seen a great deal of volatility due to incendiary tweets and a trade war with China. In general, the dollar has enjoyed a period of prolonged strength but the results of these elections may mean some changes. In the first of a series on the US Midterms, we take a look at how these elections have previously made an impact on the fate of the greenback.

What are the Midterm elections?

US Representatives to Congress are elected for two-year terms, and this means that on 6th November, every one of the 435 seats in the House of Representatives will be up for grabs. Senators serve for six years, and the terms work in rotation so that a proportion are up for re-election every two years. This year, 35 Senators will be heading for the polls. The US political system works on a series of checks and balances. Republicans currently have control of both houses but if the Democrats can effect a “blue wave” and flip either or both Houses, it will represent a significant obstacle to President Trump in pushing through new policies.

What is the current state of play?  

At the moment, both chambers of the legislature are controlled by Republicans. In the House, Republicans have a 54.4% share, holding 237 seats to the Democrats’ 193. There are currently five vacant seats in the House. In the Senate, the numbers don’t tell the whole story. Republicans hold 51 seats and the Democrats 47, but there are also two independents in Congress who caucus with the Democrats, making the margin much narrower and giving the Republicans just a 51% majority. 

What can we expect from the midterm results?

Historically, the party of the President often loses Congressional seats in the midterms. When, as now, a Republican is in the White House, the Republican share of the house decreases by an average of 7%. As well as the president’s party allegiance, the approval rating of the Commander-in-Chief is another factor. A recent Gallup poll put Donald Trump’s approval rating at 41%. This may have some of the Republican candidates worried because over 40% of the variation in midterm results can be attributed to presidential approval ratings. Based on historic trends, the Republicans are set for a 9% loss of seats in the House, and with only a 4.4% majority, this would be more than they can afford if they wish to maintain control. This year, there are more than usual numbers of Republican Representatives retiring or running for another political office. Statistics show that incumbent candidates always have an advantage against their challengers so these changes could weaken the Republicans further. 

What does this mean for the dollar?

We’ll be taking a closer look at the impact of the midterm elections on the dollar as polling day draws nearer. If, as historical precedent and the statistics suggest, Democrats capture either the Senate, the House or both, investor sentiment and stock prices might take a hit. Trade tensions have bolstered the US dollar so any change or frustration to the policy of tariffs may cause some fluctuation. In general, if the Democrats can take back some control, this could cause greater political uncertainty which could cause some volatility. 

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