It is now two years since President Trump was elected as the world’s most important head of state. For two years, the currency markets‘ response to the direction of US policy has been unmistakable: „America First“ also means „US Dollar First“. It may have taken some time for financial markets to have accustomed themselves to Trump’s erratic leadership style, but they have now made their peace with it, as there is no question about the successes (at least short-term) of his economic policy. At present, Trump and his Republican Party enjoy the best possible power constellation: Republicans command a majority in both houses of Congress, giving them de facto control of the legislature. This position of strength also feeds the US dollar’s vigour and it is this constellation that now stands ready for the midterm elections on 6 November.
A Democratically-controlled House of Representatives and a Republican Senate currently appear the most likely outcome. For the US president, this would signify a change to his existing political conditions. He will no longer be able to „wave through“ his legislative projects in Congress, and will instead have to tackle opposition resistance. The envisaged headwind for Trump should not be seen as equivalent to a radical turnaround in US economic policy. As the Democrats control only one of the two chambers, they are as little able to wave their ideas through the legislature as the Republicans. Although traditionally the Democratic Party is certainly anything other than a defender of stringent austerity policies, we believe that conflicts will nevertheless arise more frequently as to which specific measures are to be deployed as fiscal incentives. As a consequence, the US dollar will have to forego additional positive impulses from this side, and content itself with the (still ample) status quo. However, this also implies that US national debt will continue to climb, irrespective of majority relationships in Congress.
A change in tack in US trade policy cannot be surmised from the shift in parliamentary power. Various acts endow the US president with far-reaching powers to take sole decisions on tariffs and on non-tariff trade obstacles. Congress has no say in this context, at least initially. Congress’s approval is not required until the matters concern arranging bilateral trade agreements (such as NAFTA’s successor, the USMCA). Although presumably the path through the legislature for budget matters will consequently prove at least more time-consuming in the future, Trump will still be able to leave his mark on US trade policy through „executive orders“, as to date. His unmistakably protectionist approach over the past two years has burdened the economic prospects of the USA’s most important trade partners, and consequently also their currencies.
A Democratically-controlled House of Representatives would take on board the results of investigations (including in the Russia affair), and presumably follow up more intensively on accusations against Trump, even expanding investigations to include other issues, such as conflicts of interests and sexual harassment. In the most extreme case – impeachment, which we do not expect – it would also be the House of Representatives that would institute proceedings. As a consequence, the road to impeaching the president is far from being mapped out, and it has yet to be proved whether Trump is guilty at all. Nevertheless, a (politically motivated) prosecution of accusations against the president could prompt renewed uncertainty about domestic policy, which would tend to lead the US dollar to include a political risk premium, albeit a small one.
The most likely result currently is that the Republicans are able to defend their majority in the Senate, but that the Democrats win back the House of Representatives. We believe that this result is largely priced in and will consequently elicit only the slightest of reactions from the US dollar. A surprising double victory for the Democrats would be the most unfavourable result for the US currency short-term. By contrast, were the Republicans to defend their majority in both chambers – which is not anticipated to occur – the greenback would have the potential to extract related benefits, including long-term.