US midterms 2026: Could the election shake up the dollar?

Monfor FX Market Insights | 23 October 2026

With the US midterm elections approaching on 3 November, investors are preparing for a potentially significant shift in Washington's political landscape. As the dollar grapples with competing economic pressures, the outcome could have important consequences for US interest rates, global currency markets and businesses with international exposure.

Market overview: Currency markets face a political turning point

Global FX markets are heading towards November against an increasingly complicated economic backdrop. Elevated bond yields, persistent inflation, geopolitical tensions and uncertainty surrounding the AI investment boom are pulling investor sentiment in different directions. The US dollar has demonstrated considerable resilience, while European fiscal concerns, fluctuating energy prices and shifting demand for traditional safe-haven currencies continue to influence international capital flows. With confidence fragile and interest rate expectations frequently changing, currency markets are particularly sensitive to developments that could alter the global economic outlook.

The approaching US midterm elections are now emerging as another potentially important catalyst. Although the vote will not determine who occupies the White House, it will decide which party controls Congress for the remainder of President Donald Trump's term. With American fiscal policy, trade relations and Federal Reserve independence already attracting heightened scrutiny, a change in the balance of political power could reshape expectations for government spending, borrowing costs and the dollar. For FX markets, the central question is whether the election reinforces the currency's recent strength or provides the conditions for a broader reversal.

A strong dollar, but an uncomfortable position for Washington

One of the more striking developments ahead of the election has been the dollar's ability to appreciate despite growing concerns about America's economic and fiscal direction.

The greenback recently reached its strongest level in approximately 18 months against major currencies, supported by elevated US interest rates, international investment flows and the relative weakness of competing economies.

However, this strength presents a dilemma for the Trump administration.

A central objective of the president's economic agenda has been to revitalise American manufacturing, strengthen export competitiveness and reduce the country's trade deficit. A stronger dollar works against parts of that ambition by making US goods more expensive for overseas buyers while increasing the purchasing power of American importers.

The dollar's resilience also reflects developments beyond the United States. Fiscal concerns in France have weighed on the euro, while Japan's debt burden and interest rate outlook have presented challenges for the yen. Meanwhile, substantial capital investment in American AI infrastructure has helped sustain international demand for US assets.

Consequently, dollar strength should not necessarily be interpreted as an unequivocal vote of confidence in US economic policy. In foreign exchange markets, relative performance matters, and the dollar can strengthen simply because investors see fewer attractive alternatives.

This distinction could become increasingly important following the midterms, particularly if the election changes expectations surrounding fiscal stimulus, inflation and the future path of Federal Reserve policy.

Three election scenarios and what they could mean for the dollar

Current polling and election forecasts favour Democratic gains, particularly in the House of Representatives. Control of the Senate appears less certain, leaving several possible political outcomes with different implications for currency markets.

1. Democrats take control of both chambers: A potential dollar headwind

A Democratic victory in both the House and Senate would substantially restrict President Trump's ability to introduce additional tax cuts or major spending programmes without opposition support.

For financial markets, this could initially be interpreted as a more disciplined fiscal environment, potentially reducing concerns about further increases in the US budget deficit.

A moderation in government spending expectations could also ease pressure on Treasury yields. As elevated American borrowing costs have been an important source of support for the dollar, any sustained decline in yields could weaken its relative appeal.

Democratic control of the Senate would also provide greater influence over future Federal Reserve appointments, potentially limiting the administration's ability to secure nominees considered favourable towards lower interest rates.

Nevertheless, the implications would not be entirely straightforward. A divided relationship between Congress and the White House could complicate budget negotiations, particularly as another debt ceiling confrontation approaches in 2027.

Potential FX impact: Mildly negative for the dollar, although the reaction could be limited if investors have already positioned for Democratic gains.

2. Democrats win the House, Republicans retain the Senate: Gridlock takes centre stage

A divided Congress could prove particularly challenging for US fiscal policymaking.

With Democrats controlling the House and Republicans retaining the Senate, major spending proposals and tax reforms would face considerable legislative obstacles.

This could limit further fiscal expansion, but it would also increase the likelihood of difficult budget negotiations and potential government shutdowns.

Importantly, a Republican-controlled Senate would retain the ability to approve presidential nominees to the Federal Reserve Board. This could keep questions surrounding central bank independence in focus, particularly if future appointments are perceived as favouring a more accommodative monetary policy.

From a currency perspective, the consequences are less clear-cut. Some analysts consider this configuration particularly negative for the dollar because of the combination of political gridlock and continued uncertainty over Fed appointments. Others argue that divided government is already substantially reflected in market expectations, potentially limiting the immediate reaction.

Potential FX impact: Neutral to negative for the dollar initially, with the risk of greater volatility if fiscal negotiations or confidence in US institutions deteriorate.

3. Republicans retain control of Congress: Could the dollar rally accelerate?

Although currently viewed as a less likely outcome, Republicans retaining both chambers could deliver one of the strongest immediate reactions in currency markets.

Continued Republican control would give President Trump greater scope to pursue his economic agenda, potentially including additional tax reductions, higher spending and further measures designed to stimulate domestic investment.

While such policies could support economic growth, they might also intensify existing inflationary pressures and concerns about the federal deficit.

If markets respond by anticipating higher interest rates for longer, US Treasury yields could rise further, reinforcing the dollar's advantage over lower-yielding currencies.

This could create renewed pressure on the euro and emerging-market currencies, particularly where higher US borrowing costs and a stronger dollar tighten international financial conditions.

However, the longer-term outlook would depend on whether investors interpret rising yields as a sign of economic resilience or deteriorating fiscal confidence.

Potential FX impact: Initially bullish for the dollar, with further gains possible if expectations of tighter Federal Reserve policy strengthen.

A fourth, considerably less likely outcome would see Republicans retain the House while Democrats take the Senate. This could also produce legislative gridlock, although Democratic influence over Fed appointments would introduce a different dynamic for interest rate expectations.

What could the election mean for GBP, EUR and wider FX markets?

Although the election takes place in the United States, its implications could extend across virtually every major currency pair.

For GBP/USD, the direction of US Treasury yields and Federal Reserve expectations will remain central. A political outcome that weakens the dollar could create room for sterling to appreciate, although the pound's performance will also depend on UK growth, inflation and domestic fiscal developments.

For EUR/USD, the picture is more complicated. A reduction in American yields could provide some relief for the single currency, but lingering concerns about European public finances, particularly in France, may limit any sustained recovery. Conversely, a Republican victory that pushes US yields higher could intensify downward pressure on the euro.

Elsewhere, the Japanese yen and Swiss franc could benefit from renewed risk aversion, although their performance will depend on the nature of any market shock. A rise in US yields driven by expectations of tighter monetary policy may have a very different effect from a sell-off caused by deteriorating confidence in American finances.

Emerging-market currencies could also face heightened volatility, particularly if the election strengthens expectations of further US trade restrictions or a prolonged period of elevated dollar interest rates.

Ultimately, the response across FX markets will depend not only on which party wins, but also on how investors interpret the implications for economic growth, inflation and international capital flows.

Why the midterms matter for businesses managing currency exposure

For businesses making international payments, the implications extend well beyond election-night market movements.

A strengthening dollar can increase the sterling cost of US-dollar-denominated imports, placing pressure on purchasing budgets and profit margins. Conversely, UK companies receiving dollar revenues may benefit when those funds are converted back into sterling.

The reverse applies when the dollar weakens.

With potentially significant political and economic developments approaching, businesses may find it increasingly important to review their currency requirements rather than rely on a particular market direction.

Understanding upcoming payment obligations, assessing the impact of exchange rate movements and considering available currency risk management solutions can help improve financial visibility during uncertain periods.

At Monfor, we believe that having a clear currency strategy is often more valuable than attempting to predict the precise direction of the market.

Looking ahead: What should FX markets watch?

• 3 November, US midterm elections: Control of the House and Senate will determine the political landscape for the final two years of Trump's presidency.

• US Treasury yields: Bond market movements will provide an important indication of how investors interpret the election's implications for fiscal policy and inflation.

• Federal Reserve expectations: Changes in anticipated interest rates, alongside renewed scrutiny of future Fed appointments, could influence the dollar's direction.

• Fiscal negotiations in 2027: Potential disputes over government funding and the debt ceiling may become increasingly important for investor confidence.

• Trade policy and geopolitical risks: Middle East developments, energy prices and the possibility of further tariffs could continue to shape global currency sentiment.

• Market positioning: With some election outcomes already reflected in expectations, unexpected results may generate a more significant FX response than anticipated victories.

The Monfor outlook

The US midterms arrive at a particularly sensitive moment for the dollar and global financial markets.

While Democratic gains could introduce some downward pressure on the greenback, a Republican hold may reinforce expectations of elevated US interest rates and provide renewed support. Neither outcome guarantees a sustained currency move, particularly while inflation, geopolitical uncertainty and fiscal concerns remain influential.

The most important factor may ultimately be the difference between what markets expect and what voters deliver.

For businesses with international currency requirements, the election serves as another reminder of how quickly political developments can influence exchange rates.

With uncertainty unlikely to disappear after election night, preparation and flexibility will remain essential when navigating the months ahead.

If your business has upcoming foreign exchange requirements, speak to the Monfor dealing team to discuss current market conditions and the currency solutions available to you.

Disclaimer: This article is provided for general market information only and does not constitute financial or investment advice. Market expectations and forecasts are subject to change, and future currency movements cannot be guaranteed.