Credit Ágricole: The Midterms and USD
Betting markets increasingly point to a Democratic sweep of Congress in the 3 November US midterms, with a strong likelihood of the party taking the House and a growing risk of it winning the Senate. A Democratic-controlled Congress under President Trump would likely bring greater legislative gridlock, more uncertainty over fiscal policy, potential government shutdowns and increased scrutiny of the administration’s foreign policy. Historical FX performance suggests the dollar’s response will depend heavily on the wider economic backdrop: it has tended to weaken under a Democratic Congress and Republican president, but has sometimes rallied when a Democratic House is paired with a Republican Senate and a recovering economy. We expect legislative gridlock to add to USD headwinds in 2027, alongside slowing US growth and anticipated Fed rate cuts. A slowdown in AI investment could also reduce the appeal of US assets, while diversification flows and de-dollarisation may put further pressure on the currency. Historical midterm patterns alone offer limited guidance, as economic momentum, monetary policy and geopolitical developments have played important roles in previous episodes. Our FX
Betting markets increasingly point to a Democratic sweep of Congress in the 3 November US midterms, with a strong likelihood of the party taking the House and a growing risk of it winning the Senate. A Democratic-controlled Congress under President Trump would likely bring greater legislative gridlock, more uncertainty over fiscal policy, potential government shutdowns and increased scrutiny of the administration’s foreign policy.
Historical FX performance suggests the dollar’s response will depend heavily on the wider economic backdrop: it has tended to weaken under a Democratic Congress and Republican president, but has sometimes rallied when a Democratic House is paired with a Republican Senate and a recovering economy. We expect legislative gridlock to add to USD headwinds in 2027, alongside slowing US growth and anticipated Fed rate cuts. A slowdown in AI investment could also reduce the appeal of US assets, while diversification flows and de-dollarisation may put further pressure on the currency.
Historical midterm patterns alone offer limited guidance, as economic momentum, monetary policy and geopolitical developments have played important roles in previous episodes. Our FX outlook adapts the traditional “USD smile” into more of a “smirk”, reflecting the possibility that the dollar will provide less protection during risk-off episodes as the US becomes more reliant on foreign capital inflows that are correlated with global risk sentiment. We expect the dollar to weaken towards the bottom of this curve in 2027, driven by a narrowing interest-rate advantage and portfolio diversification away from US assets.