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Congressional Gridlock Could End Dollar’s Rally

This article was originally published on ETFTrends.com.

The dollar has been one of the world's best-performing major currencies this year, but that run could be threatened by a gridlocked Congress. In Tuesday's midterm elections, Democrats emerged with control of the House while Republicans maintained control of the Senate.

Those results were expected, but the Invesco DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) , which tracks the USD’s movements against a basket of major developed currencies, traded slightly lower Wednesday.

Analysts argued that the dollar’s strength at the start of the year was just a brief spike in a broader downward trend that began in 2017, pointing to easing of trade tensions, the ebbing effects of U.S. tax cuts and the Fed’s hesitation to tighten its monetary policy.

“While the outcome was largely expected, analysts at Morgan Stanley and Credit Agricole SA say it could lead to a gridlocked government during the rest of President Donald Trump’s term, undermining efforts to extend tax cuts and boost infrastructure spending,” according to Bloomberg. “This could weigh on the greenback, which has outperformed all Group-of-10 peers so far this year.”

U.S. Dollar Demise?

Some market observers believe a post-election decline in the dollar could be short-lived.

“Any further dollar weakening on election likely to be short-lived as investor appetite to chase the move may be low, midterms do not historically mark a break in currency trends, policy levers for USD depreciation are weak, and dollar-positive implications from the elections may be underplayed,” Bloomberg reports, citing Citigroup.

The Federal Reserve is expected to raise interest rates for a fourth time this year at its December meeting, a move that could fuel more upside for the dollar regardless of political gridlock on Capitol Hill.

On the other hand, traders who are considering a bearish position on the dollar can capitalize on the further weakness through an inverse USD strategy, the Invesco DB US Dollar Index Bearish (UDN) . UDN may be seen as the direct inverse play against UUP, rising 1.2% over the past month as the greenback weakened.

For more information on the USD, visit our U.S. dollar category.

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