Democrat Victory has Potential to Precipitate Dollar Decline

The turmoil in the USA with the storming the Capitol by Trump supporters had no lasting and visible impact on markets apart from a brief pull of the dollar and a selloff in markets in favour of defensive assets. However, it was more like a minor bump in the road rather than a turning point.

Much more attention should be paid to the market impact of Democrats dominance in US politics. This trend was formed earlier last year and could accelerate sharply on the expectation that Democrats can now pass important legislation quicker.

Shortly before Georgias election, Biden promised 2,000 stimulus checks in the event of a Democrat majority in the Senate. Political analysts expect overall US government support spending to seriously increase in the coming years.

The Fed is also expected to expand QE to keep the governments debt service costs under control via low rates thanks to a massive government bondbuying programme.

This is bad news for the dollar. The US currency has been steadily losing against a basket of the worlds major currencies DXY since late May, but a meaningful break in the trading range came in June when investors began to pivot on the loss of their ruling Republican positions amid protests in the US.

The dollar index had dipped below 90 at the start of the year, where it last traded in April 2015. An important area of early 2018 lows is at 89, half a percentage point below current levels.

A decisive dip below this level risks accelerating the dollars…

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