US Dollar heads into elections on a softer footing – MUFG

Dollar strength could be curbed if Republicans lose control of Congress, according to MUFG’s Lee Hardman, who flags risks surrounding the US mid-term elections. Further downside risks for the Dollar stem from a less hawkish Fed, declining US Treasury yields and selling pressure on US AI-related equities.

Could election risks further weaken the Dollar?

"The US dollar has continued to trade at modestly weaker levels overnight after correcting lower at the end of last week."

"The US dollar has lost upward momentum at the end of last week after the Fed’s policy update was less hawkish than expected, and AI-related US equities came under renewed selling pressure. The 2-year US Treasury yield has fallen by almost 40bps from the high at the end of September. At the long-ed of the curve, market participants will be watching closely this week’s Quarterly Refunding Announcement from the US Treasury."

"Market participants will be watching closely to see if the US AI-related sell-off extends further in the week ahead. A deeper correction poses downside risks for the US dollar."

"A damaging defeat for the Republicans could put a dampener on US dollar strength but we don’t expect it to be game changer on its own. It would limit room for further fiscal stimulus and could increase market attention on the potential for less market friendly policies beyond the current Presidency."

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