Market Wire: Dollar weakens as Democrats head for blue sweep

Donald Trump is set to spend the final two years of his presidency facing unified Congressional opposition. With results still coming in, major broadcasters are giving Democrats greater than 95% odds of flipping both the House and the Senate in today’s midterm elections.

Investors had anticipated a Republican defeat. Data ahead of the vote showed Donald Trump with the lowest approval rating of any president heading into a midterm election since modern polling began, as voter concerns about rising living costs, worsening political corruption, and the war in the Middle East outweighed unease about a Democratic lurch to the left.

But the scale of the rout was unexpected. Early estimates show Democrats on track to win at least 243 House seats, comfortably above the 218 needed for a majority, and 54 Senate seats, where 51 are required for control. Gubernatorial contests are tilting the same way, with Democrats outperforming their Republican rivals in 25 of 36 states.

Markets are unwinding “US exceptionalism” trades. Treasury yields are falling across the curve, equity futures are tumbling, and the dollar is extending its losses against its major counterparts, suggesting investors expect Democrats to rein in the administration’s spending plans, subject the artificial intelligence buildout to tougher oversight, and constrain the president’s trade and foreign policy moves.

Tonight’s moves could fade as the conclusive nature of the result eases uncertainty and helps put a floor under markets. We think currencies like the Canadian dollar, euro, and British pound — all now enjoying relief rallies against the greenback – could soften slightly as investors rebalance.

The longer-term consequences may defy easy assumptions. Fiscal policymaking will undoubtedly grow more fraught once Democrats take control of both chambers in January, though there may be room for compromise as they seek to restore spending on Medicaid and food assistance. Expectations for artificial intelligence investment may ratchet lower as investors interpret the result as a referendum on data-centre construction, but most such decisions rest with state and local governments, and President Trump is likely to veto any federal legislation aimed at the industry.

Greater congressional restraint could also backfire. Democrats and an increasingly fractious Republican contingent may press the president to roll back tariffs and end the war with Iran, but that pressure could instead embolden him to lean more heavily on executive action – and even to double down.

Markets are pricing in a gridlocked Congress. Recent history suggests they should price in a cornered president.