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A phase of stronger actions due to the mid-term elections could hurt the dollar – Credit Suisse

American politics is once again a topical issue due to the midterm elections held yesterday. Republicans are on track for a majority in the House of Representativeswhile Democrats could also lose the Senate. Then, stocks could rise, hurting the dollaraccording to Credit Suisse economists.

US Midterm Elections: Lots of Headlines and Potential Dollar Weakness

“Although the final results will not be known for a few days, the chances of the Democrats losing control of the House of Representatives, and possibly the Senate as well, are high. This would lead to another phase of “divided government“. Analysts who cover the stock market tend to lean towards stronger equities as a likely result of such an outcome.”

“Given that the rise in stocks also tends to go hand in hand with a weaker dollar, it is logical to expect that a phase of stronger actions linked to the mid-term elections could hurt the dollarwhich is why we advocate tight stops on short-term bullish dollar positions.”

Another factor to take into account is the possibility of a new showdown over the US debt limit. If this comes into play, we suspect it would not be until mid-2023 before a critical phase is reached where a real risk premium is priced into US debt and assets. This period should theoretically be bad for the dollar, especially if the rest of the world is recovering from recession at the time. But if the market is in the middle of a “risk off” phase at the time, there could be non-linear outcomes, as we can imagine the focus shifting to dollar scarcity and global risk aversion, thus driving to the dollar. But this element of the debt limit still has many months to play out and is not an immediate issue.“.

Source: Fx Street

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