Confidence in the US Dollar could weaken amid US midterms and AI jitters, experts agree

Caution ahead of the US midterm elections continues to weigh on the US Dollar (USD), despite the currency recovering most of its earlier losses on Monday. Investors remain reluctant to hold sizeable long positions in the US Dollar, while mounting fears of an AI bubble present a further risk. At the time of writing, the US Dollar Index (DXY) stands at 101.66, remaining near the lower end of its October range around 100.40.

The case for US economic exceptionalism gained further backing from last week's macroeconomic releases. A sharp acceleration in Gross Domestic Product (GDP) growth in 3Q, alongside inflation still well above the Federal Reserve's (Fed) target, sustains pressure for further interest rate increases. Yet these numbers have offered little support to the US Dollar index, whose gains have remained constrained over the past two weeks.

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A “damaging defeat for the Republicans could put a dampener on US Dollar strength” on Tuesday, warn MUFG/BTMU analysts. In their view, that result would “limit room for further fiscal stimulus” and potentially redirect market attention to “less market friendly policies beyond the current Presidency,” increasing political uncertainty surrounding the US Dollar's prospects.

Positioning and political uncertainty also feature prominently in ING's assessment of near-term drivers. The bank observes that “the main risk for the Dollar today is some precautionary unwinding of net-long positions ahead of Tuesday’s US midterm elections.”

According to ING, “a Democratic sweep is trading around 68% in prediction markets,” an outcome that “could be seen as slightly negative for the US Dollar from a few angles, from higher risk of government shutdown and gridlock on debt ceiling negotiations to potential damage to already shaky AI-related sentiment.” Its resulting assessment is that “we’d be cautious in chasing the USD upside in the next few days.”

Equity market developments take centre stage in BBH's analysis, with its experts warning that the “tech sell-off can keep USD on defensive in the near term.” Even so, BBH argues that “strong US economic activity and rising price pressures reinforce the Fed’s hawkish bias,” leaving “rate differentials” “supportive of USD” despite weaker near-term sentiment.

US midterm elections: Key questions answered

What do voters elect in the US midterms?

Held at the midpoint of a president's four-year term, the US midterms are federal elections in which voters elect all 435 House of Representatives members and roughly one-third of the Senate. Many states also elect governors and other state and local officials.

On what date will the 2026 midterms be held?

Voters go to the polls on Tuesday, 3 November 2026. Under federal law, Election Day falls on the Tuesday following November's first Monday. Many states have already begun early voting and postal voting.

What is at stake in the US midterm elections?

Control of both chambers of Congress for the final two years of President Donald Trump's term is determined by these elections. Whichever party secures a majority sets the legislative priorities and selects committee leaders. In the Senate, it also controls the confirmation of judges and senior officials.

Will voters elect a president in the 2026 midterms?

No. Presidential elections take place every four years, with the next scheduled for November 2028. The midterms are frequently regarded as a verdict on the incumbent president's party, which has historically tended to lose seats in the House.

What could the 2026 midterms mean for the US dollar?

A limited and temporary US Dollar response, rather than a sustained trend, is what most analysts anticipate. Markets broadly regard a divided Congress as the most likely outcome and have already priced it in to some extent. The impact on Treasury yields could be more pronounced. Results that strengthen expectations of fiscal stimulus typically push both yields and the US Dollar higher; legislative deadlock that restricts fresh spending can weigh on both. Disputes over funding or the debt ceiling may also briefly boost safe-haven demand for the Dollar. Across a six-to-twelve-month horizon, however, economic growth and Federal Reserve policy carry greater weight than the election result.

What is the usual stock market pattern around midterms?

Historically, US equities have tended to struggle ahead of midterm elections and strengthen afterwards. Since 1950, the S&P 500 has risen over the 12 months following every midterm election, a record of 19 out of 19, delivering an average gain of about 15%. Analysts attribute this pattern to the easing of uncertainty after the results. Past performance does not guarantee future returns, and some strategists caution that elevated valuations in 2026 could challenge this run.

Why might markets favour a divided Congress?

Divided government has frequently found favour with markets, as legislative deadlock reduces the prospect of far-reaching tax, spending and regulatory changes. With a Republican president in office, the S&P 500 has historically performed well in the years after midterms that divide control of Congress. Funding deadlines, disputes over the debt ceiling and congressional investigations nevertheless pose risks that can increase short-term volatility.