The Blue Wave and the Greenback
Surveys and projections suggest that the upcoming U.S. elections are leaning firmly in favor of the Democratic Party, giving Democrats a 90% chance of winning the House of Representatives and more than a 60% chance of winning the Senate, too. This trend comes amid contrasting macroeconomic indicators: U.S. GDP growth remains solid and unemployment is low, but the Republican Party’s growing unpopularity coincides with an inflation rate of 3.4%, gas prices up 40% since the 2024 elections and mortgage rates that have reached 7.5%.
Even if the Democrats do gain control of Congress, executive power would continue to shape business, regulations and foreign policy. Executive orders would ensure the economic agenda remains practically unchanged, propping up various sectors such as finance, information technology and communications.
Yet a Congress led by Democrats would be able to exert influence over federal spending and appointments, which could recalibrate budget priorities toward healthcare and reverse cuts to ecological initiatives. The importance of the Senate lies in its role in confirming appointments, especially to the Federal Reserve — the seat previously held by Jerome Powell will become vacant in January 2028.
A divided government, potentially with a Democratic Congress and a Republican executive branch, would support a moderate-duration position in fixed income and would be modestly beneficial for equities, as political decision-making would be limited. As was the case after the 2018 midterms, 10-year Treasury yields could peak during the elections and decline in their aftermath. Hence, the U.S. dollar would be steered more by growth and the Fed than by Congress.
The main risk in these favorable conditions is the debt ceiling. The U.S. Treasury could reach the legal limit of $41.1 trillion in 2027, and a Democratic Congress would have little incentive to approve a direct increase to the cap. Be prepared for lengthy negotiations, which could distort the bond market, put pressure on risky assets, damage confidence and cause a cyclical rise in term premia. This political uncertainty could periodically exert pressure on the U.S. dollar.
The dollar’s current strength (with EUR/USD now at 1.2 and the U.S. Dollar Index at 101.8) will respond to cyclical factors. High oil prices caused by the crisis in the Strait of Hormuz are favoring the dollar because the U.S. is a net exporter of energy (though prices are expected to moderate in the medium term).
Likewise, concerns about a stock market bubble brought about by artificial intelligence mean risk-averse investors are choosing the dollar as a safe haven. Only a major collapse in the AI sector, which would hamper growth and prompt interest-rate cuts, could significantly damage the U.S. dollar.
Furthermore, the U.S. growth advantage is beginning to narrow as the eurozone recovers, and expectations that the Fed will raise interest rates appear to have plateaued. Structurally, this situation points to a long-term weakening of the dollar, caused by current account deficits and reliance on inflows into AI stocks, as demand for U.S. bonds wanes.
Europe is the key unknown factor for the future of EUR/USD; political and fiscal uncertainty in France has driven increased government bond yield spreads. Nevertheless, we still forecast 1.15 in three months and 1.20 in 12 months. These forecasts may be more aggressive than the current consensus, but they are within the range of expectations.
In summary, a potential Democratic wave and the resulting government schism are producing a nuanced outlook for the dollar. While political paralysis would divert attention toward the Fed and economic growth, prolonged negotiations over the debt ceiling could generate some volatility and short-term pressure.
Yet, due to cyclical factors determining the dollar’s current value, structural dynamics and economic convergence with the eurozone reinforce the outlook for a gradual long-term depreciation of the U.S. dollar.
Even if the Democrats do gain control of Congress, executive power would continue to shape business, regulations and foreign policy. Executive orders would ensure the economic agenda remains practically unchanged, propping up various sectors such as finance, information technology and communications.
Yet a Congress led by Democrats would be able to exert influence over federal spending and appointments, which could recalibrate budget priorities toward healthcare and reverse cuts to ecological initiatives. The importance of the Senate lies in its role in confirming appointments, especially to the Federal Reserve — the seat previously held by Jerome Powell will become vacant in January 2028.
A divided government, potentially with a Democratic Congress and a Republican executive branch, would support a moderate-duration position in fixed income and would be modestly beneficial for equities, as political decision-making would be limited. As was the case after the 2018 midterms, 10-year Treasury yields could peak during the elections and decline in their aftermath. Hence, the U.S. dollar would be steered more by growth and the Fed than by Congress.
The main risk in these favorable conditions is the debt ceiling. The U.S. Treasury could reach the legal limit of $41.1 trillion in 2027, and a Democratic Congress would have little incentive to approve a direct increase to the cap. Be prepared for lengthy negotiations, which could distort the bond market, put pressure on risky assets, damage confidence and cause a cyclical rise in term premia. This political uncertainty could periodically exert pressure on the U.S. dollar.
The dollar’s current strength (with EUR/USD now at 1.2 and the U.S. Dollar Index at 101.8) will respond to cyclical factors. High oil prices caused by the crisis in the Strait of Hormuz are favoring the dollar because the U.S. is a net exporter of energy (though prices are expected to moderate in the medium term).
Likewise, concerns about a stock market bubble brought about by artificial intelligence mean risk-averse investors are choosing the dollar as a safe haven. Only a major collapse in the AI sector, which would hamper growth and prompt interest-rate cuts, could significantly damage the U.S. dollar.
Furthermore, the U.S. growth advantage is beginning to narrow as the eurozone recovers, and expectations that the Fed will raise interest rates appear to have plateaued. Structurally, this situation points to a long-term weakening of the dollar, caused by current account deficits and reliance on inflows into AI stocks, as demand for U.S. bonds wanes.
Europe is the key unknown factor for the future of EUR/USD; political and fiscal uncertainty in France has driven increased government bond yield spreads. Nevertheless, we still forecast 1.15 in three months and 1.20 in 12 months. These forecasts may be more aggressive than the current consensus, but they are within the range of expectations.
In summary, a potential Democratic wave and the resulting government schism are producing a nuanced outlook for the dollar. While political paralysis would divert attention toward the Fed and economic growth, prolonged negotiations over the debt ceiling could generate some volatility and short-term pressure.
Yet, due to cyclical factors determining the dollar’s current value, structural dynamics and economic convergence with the eurozone reinforce the outlook for a gradual long-term depreciation of the U.S. dollar.
Previous article![]( "By Closing Its Doors, Washington Puts Its Own Future at Risk")
