What Democratic Senate Gains Mean for the US Economy

The headline news across the US at the minute is that the Democrats are poised to take control of the Senate, as they won the hotly contested race in Georgia. This is undoubtedly good news for Joe Biden and his plans when he takes office later this month. But what does it mean for the US economy? The general feeling among analysts seems to be that the Senate controlled by the Democrats will be positive overall going forward. However they also feel it will favor riskier investments, and that it could be bad for bonds and the US dollar.

The dollar drops as the Democrats gain

The initial market reaction appears to have proven the analyst right, as the dollar hit its lowest value in almost 3 years on Wednesday (6 January). The dollar index slipped slightly during Tuesday night, and when European markets opened it slipped further, meaning Wall Street woke up to find the lowest dollar index since April 2018. The dollar also hit its lowest value against the Swiss Franc in 6 years, hitting 0.8761.

The dollar drop in the wake of the Democratic Senate gains can partly be explained by the fact that, although the Georgia victories were deemed possible, they weren’t predicted as a certainty. In a note to clients, Derek Halpenny, head of research at MUFG, said that the financial group had “not assumed Democrat victories in these elections”, meaning that some of their initial reported predictions of the USD weakness may need to be revised. He added an end of year target of 1.2800 for EUR-USD.

USD not likely to gain momentum until the result is clear

As of Wednesday afternoon EST, a Democratic victory appears to be all but decisive. However the vote is pretty, tight, meaning the official result might not be set in stone for some time yet – similar to President Trump’s continued refusal to concede the US Presidential Election. The dollar is likely to remain relatively weak until the result is 100% official, after which a likely surge could take place when market participants are confident about the side they’re going to bet on.

Trump to leave Biden with tense China relations

Moving away from the Senate vote, President Trump has this week signed an executive order that bans US transactions with no less than 8 Chinese software companies. Trump’s relationship with China has been one of the constant headline-grabbing stories of his Presidency. The signing of this transaction ban will leave the Biden Administration with a lot of bridges to rebuild when the Democratic veteran takes office later this month.

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