Dollar to Resume Supreme Reign but Faces Wild Week Amid Midterms, Inflation

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By Yasin Ebrahim

AiVIF.com – The dollar wobbled Monday, but that hasn’t squeezed the life out of bets for the greenback to reign supreme in the coming weeks with the midterms and fresh inflation data on the horizon.

The U.S. dollar index, or DXY, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.67% to 110.04.

The U.S. midterm elections, which kick off on Tuesday, and inflation data due Thursday will drive FX volatility this week, ING said, but continued to back its near-term bullish USD bias, expecting “DXY to climb back above 113.00 in the coming weeks.”

Republicans are widely expected to take control of the House in the midterms, dealing a blow to President Joe Biden’s legislative agenda, but that risk is mostly priced in.

"Recent polling indicates that the Republicans will take the House of Representatives, with the Senate going down to the wire," ANZ Research said in a note.

The bigger downside risk for the dollar, however, is that “the Republicans secure control of both the House and the Senate, which would imply a hamstrung administration unable to deliver fiscal support in a downturn,” ING added.

Beyond the politics, fresh inflation data expected to show that ongoing underlying price pressures, ING says, “may prevent markets from completely discarding another 75bp hike in December, ultimately offering the dollar a floor.”

Others agree and insist that even as the Fed is likely to slow its pace of rate hikes, other central banks will struggle to keep up.

As the Fed is set to deliver rate hikes that other central banks “will increasingly struggle to match,” Goldman Sachs believes, the growing case for “policy divergence will keep the dollar in favor, ahead.}}