US elections and their impact on the dollar

23.10.2018 17:26|Marcin Lipka

"U.S. Congress elections that are taking place in the middle of the presidential term may significantly change the political power balance in the USA. This will probably affect the dollar's valuation, and also, indirectly, other currencies," writes Marcin Lipka, Conotoxia Senior Analyst.

Currently, the Republicans, who control both Congress and the White House, enjoy full legislative and executive powers. However, this may change. It is clear that the House of Representatives will be taken over by Democracy. Can this have an impact on the currency market, and if so, what kind of impact?

A twisted game for gaining power

The midterm election, i.e. political battle for about one-third of seats in the Senate (this time 35) and all 435 seats in the House of Representatives, is not as popular as the presidential and congressional elections held at the same time every four years. This is shown by the attendance statistics, which is about 20 percentage points lower than the elections for the main resident of the White House.

This time, because of the strong polarisation of the political scene in the USA, there may be greater interest in the elections scheduled for November 6th. The stake is also quite significant, as the Democratic takeover of at least one chamber of Congress may give them a good push towards the prestigious presidential elections in 2020 and the possibility of blocking some of the Republicans' activities.

Although the dominance of the Republicans in the Senate is slight (they have 51 out of 100 seats), they will probably maintain the majority in this situation. This is because the fight will only take place for 9 places currently occupied by the Conservatives and as many as 26 seats held by the Democrats.

Estimates by the election expert FiveThirtyEight platform indicate that the Republicans have an 80% chance of maintaining the majority in the Senate. The projections for the House of Representatives are a reflection of this research. The chance of the lower house of Congress being taken over by the Democrats is about 83% (according to "FiveThirtyEight" estimates). What does this mean for the dollar?

Scenarios for the dollar

This year has been favourable for the US currency so far. Globally, it gained about 4% of its value (dollar index), and in relation to the zloty, this was an increase at the level of almost 8%. The dollar's strength was mainly a result of solid economic growth in the United States and interest rate rises by the Fed. The weakness of other currencies was a result of poorer prospects for GDP in the eurozone and high oil prices, which threaten emerging countries and increase their operating costs.

In the most likely scenario, i.e. only the Democrats winning in the House of Representatives, the dollar may depreciate, but it seems that the decline should not be strong and it is unlikely to interrupt the upward trend of the dollar. The US currency should still be supported by strong economic growth and the prospect of further interest rate hikes.

A lot could change if the entire Congress was taken over by the Democrats. They could hamper the mild fiscal policy of the US by blocking an increase in the debt limit and, at the same time, the risk of deep political conflict with the White House would increase. A wide public mandate could also raise the temperature of the conflict and the risk of Donald Trump's impeachment. In such an environment, in the next few months, the dollar could lose value, which at the same time would probably be a support for the zloty.

The status quo scenario should be positive for the dollar. Power in Republican hands is an opportunity to increase fiscal stimulation. President Trump recently mentioned the possibility of reducing taxes by 10% for the middle class after the midterms. This would increase household consumption and increase the already strong GDP growth. The Fed would probably respond to such a policy with higher rates, which would support the dollar and could weaken the Polish currency.

Important internal impulses

It is also worth remembering that the dollar's condition, just like in recent months, is not only a result of events in the United States. The economic situation in other countries is also important. Given the problems in the eurozone, the trade war that threatens China and high oil prices, it is likely that only the extreme scenario (the Democrats winning in both chambers) could significantly damage the dollar.

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