US Dollar continues to face elevated political risks – Commerzbank

The forthcoming US midterm elections are expected to bring little change to FX markets, even if Washington’s balance of power shifts, according to Commerzbank’s Thu Lan Nguyen. Political risks facing the US Dollar are unlikely to recede after the vote, given Trump’s heavy reliance on executive orders to pursue trade and foreign policy. Such policies could weaken the Dollar’s global dominance, leaving investors exposed to fresh surges in hedging costs.

Midterms expected to leave FX markets largely unchanged

"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.)