US Dollar After the Midterms: Five Questions That Will Shape the Dollar Outlook

The US midterms delivered a stunning rebuke to President Trump, with Democrats regaining control of both the House of Representatives and the Senate in a decisive shift in the balance of power in Washington. Yet the implications for the dollar are far from clear-cut. We could simply be trading one set of uncertainties and concerns for another. Here, Bondford considers five unanswered questions that will shape the dollar's outlook over the remainder of Trump's presidential term.

Can Washington still govern? US political gridlock and the dollar

Trump entered his second term with Republicans controlling both houses of Congress and with a firm grip over his party, allowing him to push through much of his domestic agenda. However, with Democrats now in control of both chambers, legislation involving taxes, spending, immigration and other policy priorities will become considerably harder to pass.

Indeed, Trump has pledged to become "Mr Veto", rejecting Democrat-backed legislation, while leading Democrats have struck a more confrontational tone, telling Trump and his allies to "lawyer up" as they prepare to use their newfound powers to investigate the administration, including the business dealings of Trump's family and associates. The prospect of two years of political confrontation and legislative gridlock looks increasingly likely.

For fiscal policy, this cuts both ways. A Democrat-controlled Congress could constrain Trump's appetite for further tax cuts and spending increases, potentially easing concerns about the budget deficit and mounting Treasury issuance. However, the prospect of protracted budget negotiations and government shutdowns could introduce another source of uncertainty for investors. The US fiscal position remains a structural concern, and political paralysis offers little prospect of a meaningful solution.

There is also the question of whether Republicans will continue to fall in behind Trump. With the 2028 presidential race already looming, some may become more concerned with their own political futures than supporting an increasingly unpopular President. Vice President JD Vance has already blamed the Iran war for the party's defeat, while potential presidential contender Ron DeSantis has described the results as an "extinction-level event" for Republicans. Trump may find he has few friends when things get tough.

Is the Iran war approaching an end? Safe-haven demand and the dollar

One issue that Republicans have been quick to identify as a major factor behind their defeat is the unpopularity of Trump's military intervention in Iran. The conflict has driven up energy prices, exacerbating an existing cost-of-living squeeze and contributing to the inflationary pressures that have plagued the US economy.

So will Trump abandon a policy that has created considerable global economic uncertainty, supported safe-haven demand for the dollar and fuelled inflation? Or will he double down? Foreign policy is one area where the President retains considerable executive authority, and losing control of Congress does not automatically prevent him from continuing military operations. However, Congress retains important powers over military funding and the authorisation of prolonged hostilities.

Trump therefore faces a difficult choice. He could seek a negotiated exit, presenting an end to the conflict as a victory, or risk further escalation in an attempt to achieve his original objectives. Vance's public criticism of the war suggests pressure from within his own party is already mounting. For the dollar, an end to hostilities could reduce safe-haven demand and ease energy-price pressures, potentially easing pressure on the Federal Reserve to keep interest rates higher. Conversely, a prolonged conflict could sustain demand for dollar liquidity and safe-haven assets.

Is Trump’s tariff agenda running out of road?

A Democrat-controlled Congress could make further expansion of Trump's tariff programme more difficult, but it would be wrong to assume that existing tariffs can simply be dismantled. While Congress has constitutional authority over trade and tariffs, successive laws have delegated significant powers to the President, allowing him to impose duties without securing fresh congressional approval.

The more likely outcomes are that new tariffs become harder to introduce, existing measures face greater political and legal scrutiny, or the administration moderates its approach ahead of the next presidential election. Reduced trade uncertainty could improve global risk appetite and diminish demand for the dollar as a safe haven. Lower tariffs could also ease US inflationary pressures, potentially giving the Federal Reserve more scope to cut interest rates. More broadly, the election raises the question of whether Trump's protectionist agenda is losing its political appeal, particularly given the contribution of higher import costs to the cost-of-living squeeze.

Could the political climate undermine America’s AI boom?

The election has also raised questions about the future of America's AI investment boom. US tech stocks fell sharply following the midterm results, as investors anticipated greater scrutiny of the sector under a Democrat-controlled Congress. Local opposition to data-centre developments has also gathered momentum, with voters backing measures to restrict or block projects in several communities.

Democrats have increasingly tapped into concerns about the industry's demands on electricity and water supplies, its impact on household utility bills and the wider consequences of AI. While greater congressional oversight does not necessarily translate into sweeping federal restrictions, the political climate has clearly shifted. The Trump administration had been a strong supporter of rapid AI development, and a more sceptical Congress could make that expansion harder to sustain.

For the dollar, the question is whether political and regulatory uncertainty undermines confidence in the US technology sector as a driver of productivity, investment and economic outperformance.

Can confidence in US institutions and the Federal Reserve be restored?

One of the persistent headwinds for the dollar has been Trump's repeated attacks on the Federal Reserve and his attempts to exert pressure on monetary policy. Investors place considerable value on the Fed's independence and its ability to make decisions free from political interference. Any erosion of that confidence risks undermining the dollar's longer-term credibility.

A politically weakened and increasingly distracted Trump could give the Fed greater breathing space to pursue its inflation mandate without constant pressure from the White House. A Democrat-controlled Senate will also have a greater say over the confirmation of future presidential nominees, including appointments to the Federal Reserve Board and other key institutions.

Whether that proves sufficient to reverse the damage already done to investor confidence remains to be seen, but it could provide an important counterweight to the dollar's recent political headwinds.

Bondford’s outlook for the US dollar

The midterms have created a more complicated outlook for the dollar, with competing forces pulling in different directions:

• Dollar-negative: Weaker demand for US assets, softer US growth expectations and an easing of geopolitical tensions.

• Potentially dollar-positive: Greater institutional checks on Trump, reduced tariff uncertainty and improved confidence in US policymaking.

• Unresolved: The structural US fiscal deficit, the Fed's independence and the longer-term direction of American foreign and trade policy.

The midterms may have weakened Trump's ability to shape US policy, but they have done little to remove the uncertainty surrounding it. For the dollar, a less powerful Trump does not necessarily mean a less unpredictable America.

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This commentary reflects Bondford’s views and should not be construed as representing the views of the author’s employer or any other affiliated organisation.