US Dollar: Modestly bearish path under gridlock – TD Securities

TD Securities’ Jayati Bharadwaj expects a divided Congress to keep macro fundamentals as the main driver for FX, maintaining a modestly bearish view on the Dollar into year-end. The bank argues fiscal gridlock should narrow U.S.-RoW growth and rate differentials while supporting institutional credibility. A Democratic sweep is seen as initially USD-positive, whereas continued GOP control is viewed as the most USD-negative outcome.

Gridlock keeps macro in control

"We expect a divided Congress, leaving macro fundamentals as the primary driver of FX and supporting our modestly bearish USD view into year-end."

"Modestly bearish to neutral USD. Fiscal gridlock reduces the scope for further fiscal stimulus and points to narrower U.S.-RoW growth and rate differentials, but improved fiscal discipline and institutional credibility should limit USD downside."

"Divided government should modestly narrow U.S. growth and rate differentials, leaving the USD modestly bearish to neutral. Lower likelihood of new tariffs and White House pressure on the Fed should ease upside risks for copper and aluminum, reinforce Fed independence, and temper the bullish case for gold and silver."

"Most USD-bullish outcome initially. Markets are likely to view a Democratic sweep as supportive for Fed independence, institutional checks and balances, and a reduction in some of the fiscal and political risk premia embedded in U.S. assets."

"Most USD-bearish scenario. Prospects for additional tax cuts, higher defense spending, and making more of the OBBBA permanent would reinforce concerns around fiscal sustainability and the deficit trajectory."