Investors and traders across the globe have been paying a close attention to the U.S. mid-term elections which delivered a divided Congress on November 7. The initial reaction to the results was somewhat a weaker Dollar and higher Treasury yield. A split congress with Democrats controlling the House of Representatives and Republicans maintaining a Senate majority suggests that prospects of President Trump introducing further fiscal stimulus becomes less likely. However, chances remain high to get some middleclass tax cuts as a Democrat opposition to them will increase the probability of another fouryear term for President Trump in 2020. This explains why the U.S. 10-year Treasury yields rallied after an initial decline of 8 basis points when mid-term election results were announced. The Greenback somewhat mirrored the direction of U.S. Treasury yields. After falling to a 3-week low on Wednesday, the Dollar index recovered rapidly the following day, suggesting that bulls remain well in control for now.
The Dollar’s trajectory was tested again on Thursday after the Federal Reserve concluded its two-day policy meeting. Monetary policymakers stayed on course for further increase in interest rates, with the next rate hike expected to occur in December. The statement was hawkishly tilted, given the strength in the labor market and wage growth which accelerated at its fastest pace in nearly a decade. Although business fixed investment has moderated from its rapid pace earlier in the year, this was not enough to raise any red flags. The Fed didn’t even mention the steep equity markets selloff in October, suggesting that the Fed is continuing to focus on economic data and not Wall Street’s action.
Unless the economy experiences significant deterioration in the following weeks and months, there’s no valid justification for the Fed to end or slow down it’s tightening cycle. For this reason, the Dollar may continue marching higher, especially if spread differentials between the U.S. and E.U. continue to widen. Other factors driving the Dollar higher is the rising uncertainty across the global economy. Heightened anxiety around trade tensions, Italy’s budget clash with Brussels, Brexit talk, signs of global growth slowing down, and other geopolitical risks are all considered factors to keep the Dollar well supported. Until we see appetite to risk returning, I think Dollar bulls will continue driving the currency higher towards year end.