Forex Today: US Dollar faces pressure as control of Congress shifts to Democrats

What is in focus for markets on Wednesday, 4 November?

Weakness in the US Dollar (USD) against its major peers marks early Wednesday trading, with markets weighing the midterm election results. On the European data calendar, the Eurozone's preliminary October inflation figures are due. Attention will then turn 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) later in the day.

How Is the US Dollar Performing Today?

Against the major currencies listed below, today's percentage moves in the US Dollar (USD) are shown in the table. The Swiss Franc recorded the strongest performance against the US Dollar.

	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 appear 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 its 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

Control of the US Congress for the final two years of Donald Trump's presidency passed to the Democrats after they won both the Senate and the House in the midterm elections. According to the Wall Street Journal, Trump described the Iran war as "partly to blame" for the Republicans' defeat, while saying he had no plans for personnel changes within his administration. In the initial market response to the results, US stock index futures show a mixed performance. The USD Index remains in negative territory around 101.50, while the benchmark 10-year US Treasury bond yield remains under pressure below 4.95%.

Could renewed pressure on US equities and Nasdaq deepen Dollar weakness?

With equity-related support for the Dollar fading, Commerzbank analysts caution that “Dollar weakness could therefore become somewhat more entrenched over the coming hours.” They point out that the currency's recent strength has “benefited substantially in recent months from the enthusiasm surrounding US equities and the resulting capital inflows.” Against this backdrop, their warning is that “US equities, and the more tech-heavy Nasdaq in particular, are likely to come under pressure today,”

On the longer-term outlook rather than the initial market response, Commerzbank also says that “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 trading above $4,000 on Wednesday after advancing more than 2%, with broad-based USD weakness lending support and strengthening bullish momentum.

New Zealand's labour market figures, released early in the Asian session, showed a rise in the third-quarter Unemployment Rate to 5.7% from 5.6%, a weaker outcome than the market forecast of 5.5%. The disappointing data have not prevented NZD/USD from gaining bullish momentum on Wednesday: the pair is trading just above 0.5600, around 0.4% higher on the day.

EUR/USD has given back some of its daily advance, easing towards 1.1230 after earlier reaching a fresh two-week peak above 1.1250. The Harmonised Index of Consumer Prices (HICP) is forecast to show a 4% annual increase, compared with the 3.8% rise registered in September.

GBP/USD is trading above 1.3450 at its strongest level since mid-September, taking its run of gains to a sixth straight day on Wednesday. A 25 basis points rate hike is expected to be announced by the Bank of England (BoE) on Thursday.

USD/JPY recovered some ground after falling steeply in Wednesday's Asian session. Even after that rebound, the pair remained about 0.4% lower on the day at the time of writing, trading just above 158.00.

US Dollar: Common 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 domestic banknotes as the ‘de facto’ currency in a significant number of other countries. No other currency is traded more widely: according to 2022 data, it accounts for over 88% of global foreign exchange turnover, equivalent to average daily transactions of $6.6 trillion. The British Pound was replaced by the USD as the world's reserve currency after the Second World War. Gold backed the US Dollar for most of its history, until the Gold Standard ended with the Bretton Woods Agreement in 1971.

Why do Federal Reserve decisions affect the US Dollar?

Monetary policy set by the Federal Reserve (Fed) is the single biggest influence on the US Dollar's value. To fulfil its dual mandate of price stability (controlling inflation) and full employment, the Fed relies primarily on interest rate adjustments. If prices increase too rapidly and inflation exceeds its 2% target, the Fed raises rates, supporting the USD. Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut interest rates, putting pressure on the Greenback.

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

Printing additional Dollars and implementing quantitative easing (QE) is another option available to the Federal Reserve in extreme circumstances. Through QE, the Fed substantially expands credit flows in a financial system that has stalled. This unconventional policy is used when credit dries up as banks refuse to lend to one another for fear of counterparty default. If interest rate cuts alone are unlikely to deliver the required outcome, QE serves as a last resort. The Fed chose this tool to tackle the credit crunch during the Great Financial Crisis in 2008. Under QE, newly printed Dollars are used by the Fed 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 opposite approach is quantitative tightening (QT): the Federal Reserve ceases bond purchases from financial institutions and, as bonds in its portfolio mature, does not reinvest the principal in further purchases. This generally supports the US Dollar.