US midterms and AI concerns might erode confidence in the US Dollar, experts agree

At 101.66 at the time of writing, the US Dollar Index (DXY) remains near the lower end of its October range, around 100.40. Although the US Dollar (USD) has recovered most of its earlier losses on Monday, it remains under pressure as investors hesitate to maintain sizeable long positions ahead of the US midterm elections. Mounting concerns over an AI bubble present a further risk.

A sharp acceleration in Gross Domestic Product (GDP) growth in 3Q, alongside inflation still well above the Federal Reserve's (Fed) target, has maintained pressure for further interest rate rises. Last week's macroeconomic releases therefore lent weight to the narrative of US economic exceptionalism. Yet the US Dollar Index has drawn little support from the figures, with gains remaining constrained over the past two weeks.

US Dollar gains stall as midterm elections and tech sell-off weigh

Tuesday's vote could bring a “damaging defeat for the Republicans could put a dampener on US Dollar strength”, analysts at MUFG/BTMU warn. In their view, that result would “limit room for further fiscal stimulus” while potentially directing market attention towards “less market friendly policies beyond the current Presidency,” introducing further political uncertainty into the US Dollar outlook.

Positioning and political uncertainty also feature prominently in ING's assessment of the near-term outlook. The bank observes that “the main risk for the Dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections.”

According to ING, “a Democratic sweep is trading around 68% in prediction markets,” and that outcome “could be seen as slightly negative for the US Dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.” With those risks in mind, the bank concludes that “we’d be cautious in chasing the USD upside in the next few days.”

Equity markets, by contrast, are the main concern for BBH experts, who warn that the “tech sell-off can keep USD on defensive in the near term.” Nevertheless, BBH argues that “strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias,” leaving “rate differentials” likely to remain “supportive of USD” despite weaker near-term sentiment.