Forex Today: Democrats take control of Congress, putting US Dollar under pressure

4 November, Wednesday: key market developments to watch

Early Wednesday trading sees the US Dollar (USD) losing ground against its major peers. Markets are weighing the midterm election outcome. On the European calendar, the focus is on preliminary Eurozone inflation figures for October. Attention later turns to the United States (US), where market participants will scrutinise ADP Employment Change and the Institute for Supply Management's Services Purchasing Managers' Index (PMI).

US Dollar Performance Today

The US Dollar recorded its largest decline against the Swiss Franc today. Percentage moves in the US Dollar (USD) against the major currencies listed are shown in the table below.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.30%	-0.34%	-0.36%	-0.26%	-0.35%	0.03%	-0.40%
EUR	0.30%		-0.04%	-0.07%	0.02%	-0.07%	0.31%	-0.10%
GBP	0.34%	0.04%		-0.02%	0.09%	-0.01%	0.36%	-0.06%
JPY	0.36%	0.07%	0.02%		0.12%	0.02%	0.38%	-0.03%
CAD	0.26%	-0.02%	-0.09%	-0.12%		-0.10%	0.26%	-0.15%
AUD	0.35%	0.07%	0.00%	-0.02%	0.10%		0.36%	-0.05%
NZD	-0.03%	-0.31%	-0.36%	-0.38%	-0.26%	-0.36%		-0.40%
CHF	0.40%	0.10%	0.06%	0.03%	0.15%	0.05%	0.40%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. Selecting the US Dollar on the left and following that row across to the Japanese Yen, for instance, gives the percentage change for USD (base)/JPY (quote) in the corresponding cell.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Victory in both the Senate and the House gives the Democrats control of the US Congress for the final two years of Donald Trump's presidency following the midterm elections. According to the Wall Street Journal, Trump accepted that the Iran war was "partly to blame" for the Republicans' loss but said he had no plans for personnel changes within his administration. In the initial market response, US stock index futures are mixed. The USD Index remains lower near 101.50, while the benchmark 10-year US Treasury bond yield remains under pressure below 4.95%.

US equities and Nasdaq under fresh pressure as Dollar support fades

Commerzbank analysts attribute the Dollar’s recent strength to having “benefited substantially in recent months from the enthusiasm surrounding US equities and the resulting capital inflows.” Their warning is that “US equities, and the more tech-heavy Nasdaq in particular, are likely to come under pressure today,” with this equity-related support now fading. As a result, they caution that “Dollar weakness could therefore become somewhat more entrenched over the coming hours.”

For the longer-term outlook, rather than the initial market response, Commerzbank offers a conditional view: “if political debate in the United States were to shift back toward a more constructive direction, admittedly a very big if, this could reduce the political risk premium embedded in the US Dollar and provide the currency with structural support over the longer term.”

Gold is up more than 2% on Wednesday, trading above $4,000 as broad-based USD losses fuel its upward momentum.

New Zealand's Unemployment Rate reached 5.7% in the third quarter, up from 5.6%, figures released early in the Asian session showed. The outcome was worse than the market forecast of 5.5%. The disappointing labour market report has not prevented NZD/USD from gaining upward momentum on Wednesday. The pair is trading just above 0.5600, around 0.4% higher on the day.

EUR/USD has surrendered part of its daily advance, easing towards 1.1230 after earlier reaching a new two-week high above 1.1250. Annual growth in the Harmonised Index of Consumer Prices (HICP) is forecast at 4%, compared with September's 3.8% increase.

GBP/USD is trading above 1.3450, its highest since mid-September, as Wednesday brings a sixth successive day of gains. A 25 basis points rate increase is expected from the Bank of England (BoE) on Thursday.

USD/JPY recovered some ground after a steep fall during Wednesday's Asian session. At the time of writing, it stood just above 158.00, leaving the pair around 0.4% lower on the day.

US Dollar: Key Questions

What role does the US Dollar play?

As the official currency of the United States of America, the US Dollar (USD) also circulates alongside local banknotes in a significant number of other countries, serving as their ‘de facto’ currency. No other currency is traded more heavily. Data from 2022 put its share of global foreign exchange turnover at over 88%, equivalent to average daily transactions of $6.6 trillion. After the Second World War, the USD replaced the British Pound as the world's reserve currency. Gold backed the US Dollar for most of its history, until the Bretton Woods Agreement in 1971 brought the Gold Standard to an end.

How does Federal Reserve policy affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar's value. The Fed's dual mandate combines price stability, meaning control of inflation, with full employment. Adjusting interest rates is its main means of pursuing both objectives. If prices climb too rapidly and inflation exceeds the Fed's 2% target, it raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt rate cuts, putting pressure on the Greenback.

How does Quantitative Easing work, and what does it mean for the US Dollar?

When conditions become extreme, the Federal Reserve can print additional Dollars through quantitative easing (QE). This process substantially expands the flow of credit through a financial system that has stalled. As an unconventional policy tool, QE addresses a credit shortage caused by banks refusing to lend to one another for fear of counterparty default. It is a last resort when interest rate cuts alone are unlikely to deliver the required outcome. During the Great Financial Crisis in 2008, the Fed chose QE to counter the credit crunch. The process involves printing more Dollars to purchase US government bonds, mainly from financial institutions. A weaker US Dollar is the usual result.

How does Quantitative Tightening work, and what does it mean for the US Dollar?

The reverse approach is quantitative tightening (QT). Under QT, the Federal Reserve halts bond purchases from financial institutions and refrains from reinvesting the principal repaid as its existing bonds mature. This typically supports the US Dollar.