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- The US dollar took a hit last week, mainly because US inflation figures came in lower than expected.
- Financial markets are optimistic that US interest rates will rise faster than previously thought, making dollar-denominated parking money less attractive.
- iBanFirst’s currency expert Joost Derks explains how the results of the US midterm elections could affect the dollar.
Analysis – Investors hate uncertainty. Stock prices on Wall Street rallied last week, even though the results of the US midterm elections were still a long time coming. Of course, it should do everything Better than expected inflation figures In America.
US inflation was 7.7 percent year-over-year in October. That’s down from last month’s 8.2 percent and well below the roughly 8 percent economists had expected.
There is one big similarity between low inflation and the developments surrounding the US elections: they are both positive for equity markets and negative for the dollar.
Low inflation puts less pressure on the Federal Reserve to raise interest rates further. The prospect of US interest rates rising at a slower pace makes it less attractive for investors to hold their assets in dollars.
zUnder a majority in the House of Representatives, Biden is less able to boost the US economy
The connection between the weak dollar and the US midterm elections is a bit more complicated. If Republicans manage to hold a slim majority in the House of Representatives, it will be more difficult for Democrats to get new legislation through Congress. This may be annoying for President Joe Biden, but for the rest of the world, a divided US Congress doesn’t have to turn out so badly.
Biden’s massive investments in infrastructure and sustainability, among others, have significantly fueled America’s economic growth. An additional effect is that inflation has also increased. This very high inflation has prompted the Federal Reserve to raise key rates sharply this year.
A loss of the House majority would make it less likely for Biden to hit the economic accelerator, meaning the Federal Reserve wouldn’t need to brake as hard to control inflation.
The value of the US dollar is low
If U.S. interest rates continue to rise at a slower pace than previously thought, an important tailwind behind the dollar could disappear. This also happens when tensions in financial markets ease.
The US currency is considered a safe haven during uncertain stock market times. For example, all the factors that have boosted the dollar over the past year suddenly seem to be working against the US currency.
At the end of September you only got 96 dollar cents to the euro, now it’s back to 1.03 Dollars per Euro. Admittedly, the movement isn’t as spectacular as that one Bitcoin. But it is worth noting that the euro is now clearly worth more than the dollar. That may be the case for now.
Joost Derks is a currency expert iBanFirst. He has over twenty years of experience in the currency world.
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