US Dollar: Political risks stay elevated – Commerzbank

Commerzbank’s Thu Lan Nguyen expects the upcoming US midterm elections to have a limited impact on FX markets, even if they shift the balance of power in Washington. With Trump relying heavily on executive orders in trade and foreign policy, political risks to the US Dollar are unlikely to fade after the vote. These policies could undermine the Dollar’s global dominance and expose investors to renewed spikes in hedging costs.

Midterms seen as FX non-event

"Despite the likely shift in the balance of power in Washington, there are indeed good reasons to expect relatively little to change for FX markets, at least in the short to medium term."

"In other policy areas that are important to Trump, such as foreign and trade policy, he has in any case relied primarily on executive orders recently."

"The risks to the dollar stemming from erratic US policymaking are therefore unlikely to disappear even in the event of a Democratic victory in the midterms."

"We have often emphasised that trade and foreign policy are precisely the areas that probably pose the greatest risks to the dollar. This is because they arguably have the greatest potential to undermine the dollar’s dominance as the world’s leading reserve and transaction currency."

"USD investors should therefore be prepared for the possibility that hedging costs could once again rise sharply at any time, even after the midterm elections."

"A Congress politically opposed to the next president would increase the risk of legislative gridlock. By contrast, if the president and Congress are politically aligned, the scope for more far-reaching changes in fiscal and economic policy would increase."

"Whether such changes would ultimately be positive or negative for the US dollar, however, cannot yet be determined."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)