US Dollar: Political risks stay elevated – Commerzbank

Commerzbank’s Thu Lan Nguyen anticipates the upcoming US midterm elections to have limited effects on FX markets, even if they alter the political landscape. With former President Trump relying heavily on executive orders for trade and foreign policy, political risks to the US Dollar are unlikely to diminish after the vote. These actions may weaken the Dollar's global position and subject investors to higher hedging costs.

Despite the expected shift in power at Washington, there are solid reasons to believe that FX markets will remain relatively stable in the short to medium term.

In areas of policy that matter to Trump, such as foreign and trade policy, he has predominantly used executive orders. Therefore, the risks associated with erratic US policymaking are expected to persist, even if a Democratic Party wins the midterms. Trade and foreign policy, in particular, are the areas most likely to threaten the dollar's dominance as the world's leading reserve and transaction currency, as they could undermine the dollar's supremacy.

Investors should be ready for potential increases in hedging costs at any time following the midterms.

A Congress with opposing views to the next president could heighten the risk of legislative gridlock, while a politically aligned Congress may enable more extensive fiscal and economic policy transformations. However, it remains uncertain whether these changes will be advantageous or detrimental to the US Dollar.