US Dollar Index (DXY) comes under heavy pressure from US midterm results, retesting four-week lows

• A 0.6% slide on Wednesday takes the US Dollar Index down to four-week lows of 101.25, extending its losses.
• Wednesday’s sharp US Dollar sell-off follows a landslide win for the Democratic Party.
• Investors have moved out of equities and into the safety of US government bonds amid worries over AI regulation, putting pressure on yields and the USD.

Trading 0.6% lower on the day, the US Dollar Index (DXY) faces another bearish test of support around 101.25 at the time of writing. The index tracks the US Dollar (USD) against six major currencies. Following US President Donald Trump’s midterm election defeat, the USD is Thursday’s worst-performing major currency.

Tuesday’s elections handed the Democrats control of the US Congress as well as the more closely contested Senate, inflicting a historic defeat on the Republican Party. Republican losses included traditional strongholds such as Texas, Kansas and North Carolina, where the party had governed for decades.

The election result weighed on technology shares, with further selling during the Asian session driven by fears that the Democrats would seek tighter AI regulation and halt most planned data centre developments. Demand for safe-haven government bonds strengthened as a result. Following the outcome, the 10-year note’s yield fell by as much as 10 pips, placing additional downward pressure on the USD.

ING: Overnight market moves offer a preview of 2027 trading

With the Democrats not taking office until January, investors may have been reassured enough to limit further US Dollar losses, according to ING’s Chris Turner. He nevertheless cautions that “overnight price action could provide a preview for markets in 2027,” arguing that “A Democratic Congress would be a mild dollar negative – both in terms of what it would mean for the AI story and the prospect of a prolonged US government shutdown.”

Against this backdrop, the ING Analysis Team expects US Dollar bears to remain constrained by “a still-resilient US economy and at least one more rate hike from the Federal Reserve.”

Later in the day, attention will therefore turn to the US ADP Employment Change figures and the ISM Services Purchasing Managers’ Index (PMI). Friday’s Nonfarm Payrolls (NFP) report remains the week’s main event. Anything short of a strong labour market report next Friday could fuel doubts over the US economic outlook and put further pressure on the USD.