Midterm elections unlikely to change dollar strength; Wall Street says plainly: buy the dip.

The dollar's current rally may have enough momentum to shrug off the impact of the US midterm electionseven if the elections produce a political stalemate, high interest rates and a surge in artificial intelligence (AI)-related spending are still attracting capital inflows. Investors are bracing for the policy paralysis that the November 3 vote could bring, a situation that is typically negative for the dollar, and polls show Democrats may win control of at least one chamber of Congress. However, driven by stronger-than-expected inflation data, the Bloomberg Dollar Spot Index hit its highest level this month since May 2025. And for fund managers and strategists tracking the foreign exchange market, the main drivers supporting a stronger dollar are unlikely to shift regardless of the election outcome. "While the election outcome may affect market sentiment in the short term, we believe investors should be cautious about overstating its long-term impact on the dollar," said Nathan Thooft, senior portfolio manager at Manulife Investment Management. "The FX market is ultimately driven more by relative economic growth, inflation, interest rates and capital flows than by election results alone." He noted that a divided government means fewer policy changes and reduced uncertainty, "providing a degree of stability for financial markets, including the dollar." Citigroup strategist Daniel Tobon said an analysis of past midterm election results shows the dollar tends to weaken after voting, especially if the election produces a divided governmentas is expected this time. However, he expects any weakness to be "short-lived" because other factors point in the opposite direction. Bank of America strategist Alex Cohen believes a Democrat-led Congress could block government spending or other initiatives during the remaining two years of President Trump's term, thereby dampening growth. But Trump can veto any legislation Democrats might propose to strengthen regulation (especially around artificial intelligence), keeping one of the main drivers of US equities intact. Cohen expects the dollar to strengthen this year. "If the AI trade wobbles because of the election and the dollar gets sold off, we would buy the dip," Cohen said. The dollar's biggest potential tailwind still comes from the Federal Reservethe market expects the Fed to resume raising rates after the November election. The Fed held rates steady on Wednesday, with Chair Kevin Warsh hinting that officials are "prepared to act." The Fed raised rates in September for the first time in three years, driving the dollar to its best monthly performance since March and putting it on track for a second consecutive monthly gain, up about 1.8% so far in 2026. The rally has prompted Wall Street strategists to revisit their dollar outlook, with Morgan Stanley reversing its earlier forecast that the dollar would weaken for the remainder of the year. "The market is happy to see a divided Congress, or a situation where Democrats hold only a slim majority in the Senate and cannot override a Trump veto," said Steven Englander, the bank's global head of G-10 FX research. "We believe any dollar strength will depend on the market expecting the Fed to maintain low inflation and high real rates." According to data from the US Commodity Futures Trading Commission for the week ended October 20, asset managers and non-commercial participants maintained a bullish stance on the dollar, holding bets on dollar strength of just under US$40 billion. They have been long the dollar since mid-March. Over a longer horizon, bearish factors are accumulating. Kristina Hooper, chief market strategist at Man Group, said that while safe-haven demand triggered by election disputes or other election-related dysfunction would support the dollar, she is less optimistic about its long-term prospects. "There is a lot of concern that AI capital expenditure could slow, which could have a material impact on economic growth" and "put downward pressure" on the dollar, she said. The geopolitical backdrop that previously benefited the dollar could also shift. Oil prices have risen about 80% this year, proving to be a major tailwindthe war with Iran has upended energy flows and weighed on the currencies of importing countries, including the yen and the euro. France's deteriorating fiscal outlook has added pressure on the single European currency. Trump said earlier this month that the US would not attack Iran before the November vote, but did not rule out intensifying military strikes afterward. "For the FX market after the midterms, the most important thing is how Trump treats Iran after the vote," said Noah Buffam, strategist at CIBC Capital Markets. "The current expectation seems to be that the US will substantially escalate its aggression after the midterms, but we are less certain and believe that if military action is limited, the dollar could weaken along with oil prices."