Dollar Weakens as U.S. Midterm Results Shift Congressional Balance; Won Tests 1,340 Level

The U.S. dollar's value declined in international markets following Democrats' victory in the November 2022 midterm elections, which resulted in control of both the Senate and the House of Representatives. This shift in power granted Democrats the ability to potentially obstruct the fiscal expansion and debt issuance strategies previously pursued by the Trump administration, leading to downward pressure on both U.S. Treasury yields and the dollar's strength.

As of 9:20 a.m. on November 5, the exchange rate between the South Korean won and the U.S. dollar stood at 1,340.0 won in Seoul's foreign exchange market, marking a continued decline from its low of 1,336.1 won on November 4. The rate remained near the 1,340-won level in early trading on November 5.

Economist Kim Yu-mi of Kiwoom Securities attributed the dollar's weakness to the prospect of diminished policy momentum for the Trump administration due to Democrats' control of both chambers. Moon Jeong-hee, an economist at KB Kookmin Bank, noted a historical precedent where the dollar index declined and the won-dollar exchange rate dropped from approximately 940 won to 920 won following similar midterm election results in 2006.

External factors, such as the expectations for an early end to the Middle East conflict, which led to a more than 8% decrease in international oil prices to $88.12 per barrel, also contributed to the dollar's depreciation. This, in turn, reduced demand for dollar payments and influenced South Korea's reliance on imported crude oil.

Moreover, discussions surrounding potential changes in Federal Reserve monetary policy were gaining traction. If the AI industry regulation became stricter following the shift in congressional control, it could slow U.S. economic growth and weaken expectations for further Fed rate hikes, affecting financial market reactions to policy changes compared to employment data.

However, certain factors might limit the exchange rate's decline. Semiconductor stocks faced selling pressures due to concerns about slower investment in AI data centers, leading to a decline in the Philadelphia Semiconductor Index and signaling weaker demand for memory chips. Analyst Min Kyung-won of Woori Bank anticipated only a limited decline in the won and a potential range between 1,330 and 1,340 won, influenced by foreign investor flows and net selling in the domestic stock market.