Dollar Lacks Direction as US Midterms, Payrolls and AI Risks Set Up a Critical Week

Dollar Index Slipped Toward 101.66, Weakening Against Euro, Sterling and Swiss Franc While Gaining Against Yen, Australian Dollar and New Zealand Dollar

What’s happening: Dollar traded without a clear direction during Monday’s European session, even though CME FedWatch showed the probability of a December 25bps hike rising from 70.7% at Friday’s settlement to 76.6%. The US 2-year Treasury yield was little changed around 4.59%, the 10-year eased toward 4.92%, and Brent crude fell toward $108 on reports that Washington and Tehran were exploring diplomatic options.

Why it matters: Neither the oil move nor the Fed repricing explains the uneven currency performance, so Dollar’s direction depends on which of three approaching catalysts gains influence: Tuesday’s US midterm elections, Friday’s employment report or further deterioration in AI-related equities. Each works through a different channel, so none carries a predetermined bullish or bearish Dollar outcome.

Dollar traded without a clear direction during Monday’s European session, showing divergent performance against major currencies despite a modest increase in expectations for another Fed rate hike in December. Dollar Index slipped toward 101.66, with the greenback weakening against Euro, Sterling and Swiss Franc, while gaining against Yen, Australian Dollar and New Zealand Dollar. The mixed performance offered little evidence of a dominant market-wide driver, even as investors prepared for a potentially consequential week of US political developments, employment data and further tests of the AI-related equity correction.

The currency divergence was particularly notable because Fed tightening expectations edged higher rather than lower. CME FedWatch showed the probability of a December 25bps hike increasing from 70.7% at Friday’s settlement to 76.6% on Monday. Yet the US 2-year Treasury yield was little changed around 4.59%, while the 10-year yield eased slightly toward 4.92%. The modest repricing therefore failed to generate corresponding broad Dollar strength.

Oil prices also retreated sharply as reports suggested Washington and Tehran were exploring diplomatic options. Brent crude fell toward $108, potentially easing some immediate inflation concerns. However, neither the movement in oil nor the latest Fed pricing provides a convincing explanation for the uneven currency performance.

The more important question is which of three approaching catalysts will establish a clearer direction: Tuesday’s US midterm elections, Friday’s employment report, or further deterioration in AI-related equities and financial conditions. Each carries different implications for Treasury yields, Fed expectations and Dollar demand.

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US Midterms: The House Result Is Widely Expected, but the Senate Could Matter More

Tuesday’s US midterm elections are the most immediate major event, although the outcome most investors anticipate may not itself deliver a significant surprise.

A Democratic takeover of the House of Representatives has become the prevailing market expectation. Wolfe Research’s October survey found that 96% of 138 institutional investors expected Democrats to gain control of the chamber. Other investment banks and strategists have similarly identified a Democratic House as their base case, suggesting that markets have had considerable time to incorporate the prospect into their positioning.

The more meaningful uncertainty concerns the Senate, where expectations are considerably less settled. In the same Wolfe survey, 58% of investors anticipated a Democratic Senate, while the firm’s own probability assessment was close to 49%. This leaves considerably more room for disagreement between actual results and market expectations than in the House.

The distinction matters because control of the two chambers could produce different implications for fiscal policy, political gridlock and the Federal Reserve’s institutional independence.

Divided Government, the Debt Ceiling and Treasury Supply

A Democratic House alongside a Republican Senate would create divided congressional control and constrain major legislative changes. Such an outcome could limit the scope for either party to implement substantial new fiscal measures, especially with President Donald Trump retaining veto power.

Financial markets have historically sometimes viewed political gridlock favourably because it reduces the likelihood of major policy changes. However, the familiar gridlock argument may be less reliable this time given the unusually important fiscal decisions approaching in 2027.

The federal debt ceiling represents one potential source of tension. The Bipartisan Policy Center has identified a window between late winter and mid-summer 2027 when the borrowing limit could become binding. Divided government could complicate negotiations over must-pass legislation, raising the possibility of another prolonged confrontation over federal financing.

The fiscal implications of a broader Democratic victory are also less straightforward than a simple assumption of greater spending. Some analysts have highlighted the potential deficit consequences of Democratic proposals involving tariffs, healthcare subsidies and other programmes. Yet Trump’s veto power would significantly limit the ability of a Democratic Congress to enact its full agenda without broader political agreement.

For Treasury investors, the more immediate focus may be how the election changes expectations for future borrowing, debt-ceiling negotiations and government financing requirements. Wednesday’s Treasury refunding announcement, including planned auction sizes, will provide another focal point for assessing the supply outlook.

The Treasury market may therefore offer a clearer initial indication of how investors interpret the fiscal consequences than Dollar itself. Different election outcomes could alter expectations for borrowing and political stability without producing a predictable currency response.

Senate Confirmations and Iran Policy Risk

Control of the Senate introduces another institutional dimension. Because senators confirm Federal Reserve appointments, a Democratic Senate could potentially constrain nominations perceived as threatening the central bank’s independence. TD Securities has identified this as one possible consequence of a Democratic victory in the chamber.

That consideration may matter for longer-term monetary-policy credibility, although its immediate implications for Treasury yields or Dollar are difficult to establish in advance.

The election also coincides with renewed uncertainty surrounding US policy toward Iran. Reports suggest Washington has considered military options following the vote, even as diplomatic discussions continue. No final decision to undertake an operation has been established, but developments after the election could quickly alter energy prices and inflation expectations.

The central point is that a Democratic House may be the least surprising outcome of the election, while the Senate result and the fiscal negotiations that follow could carry more consequential implications for financial markets.

A Republican hold of the House, an unexpected Senate result or prolonged uncertainty over vote counting would require investors to reassess assumptions that currently appear relatively settled.

For Dollar, however, there is no reliable basis for assigning a predetermined bullish or bearish reaction. The eventual response will depend on how election developments affect Treasury yields, fiscal expectations, monetary-policy credibility and broader risk sentiment.

Payrolls: Does the Labour Market Still Give the Fed Room to Tighten?

Friday’s US employment report represents the week’s second major catalyst, with investors assessing whether the labour market remains resilient enough to accommodate additional monetary tightening.

Economists expect October nonfarm payrolls to increase by 56K, following September’s 29K gain. The unemployment rate is expected to hold at 4.2%, while average hourly earnings growth is projected to accelerate from 0.1% to 0.3% mom.

October Payrolls: Expectations vs Previous

Inflation Backdrop and What Payrolls Could Change

The report arrives against a backdrop of persistent inflation. September headline PCE inflation accelerated from 3.4% to 3.6% yoy, while core PCE increased from 3.0% to 3.1%. The Fed subsequently held rates at 3.75–4.00%, with two policymakers dissenting in favour of an immediate hike. Several officials have continued arguing that additional tightening may be necessary.

Inflation is providing the argument for higher rates, but employment data will help determine whether the economy can absorb them.

A resilient labour-market report would reinforce confidence that further tightening remains feasible without an immediate deterioration in employment conditions. Conversely, materially weaker payrolls or a rise in unemployment could challenge the Fed’s assessment of labour-market stability and encourage markets to reconsider the December hike.

The current pricing leaves room for a meaningful response. Although the probability of a December increase has risen to approximately 77%, markets still assign a significant chance to no change. Friday’s figures could therefore alter the balance between those outcomes.

Nevertheless, payrolls will not settle the entire December policy debate. Additional inflation and employment information is due before the Fed’s next decision, while a particularly weak report could shift attention beyond interest-rate expectations toward broader growth and financial-stability risks.

AI Equities: Financial Stress Has Affected Yields More Than Dollar

The developing AI-related equity correction provides a third, less predictable source of risk.

Friday’s sharp decline in Nasdaq, accompanied by substantial semiconductor losses, reinforced concerns about the sustainability of AI investment spending and the financial returns available from increasingly expensive infrastructure projects.

The pressure has also begun extending beyond equity valuations. S&P Global Ratings’ decision to revise Meta’s credit outlook from stable to negative, without downgrading its rating, highlighted growing scrutiny of the financing implications of the AI investment cycle.

So far, the clearest cross-market response to the technology selloff has appeared in Treasury yields rather than broad Dollar appreciation. Treasury prices rose during Friday’s equity decline, while Dollar Index gained only marginally. Gold and Silver also fell sharply, raising the possibility of broader portfolio adjustment or liquidity-driven selling.

This does not establish a generalized financial-market breakdown. The credit concerns have not yet been shown to represent a systemic funding problem, and Monday’s premarket recovery in several major technology and semiconductor shares suggests that selling pressure is not uniformly persistent.

However, further deterioration in corporate credit conditions could change the transmission mechanism. If an equity correction develops into a broader funding or liquidity event, Dollar demand could become more pronounced even if lower Treasury yields initially reflect weaker growth expectations.

For now, the distinction is important: AI-related risk aversion has contributed to lower yields and cross-asset volatility, but it has not consistently produced the broad Dollar strength often associated with severe financial stress.

Different Catalysts, Different Paths for Dollar

The immediate US calendar begins with the ISM Manufacturing survey later Monday, followed by Tuesday’s midterm elections and Wednesday’s Treasury refunding announcement. Friday’s employment report will provide another major test of the Fed’s tightening outlook, while corporate earnings and credit developments could determine whether the AI-related correction deepens.

This Week’s US Calendar

• Monday: ISM Manufacturing survey
• Tuesday: US midterm elections
• Wednesday: Treasury refunding announcement, including planned auction sizes
• Friday: October employment report
• Ongoing: corporate earnings and credit developments

Three Catalysts, Three Transmission Channels

These events are connected through financial conditions, but their market effects need not point in the same direction.

An election-driven reassessment of fiscal risks could influence longer-term Treasury yields. Payrolls could alter expectations for the Fed’s next move. A deeper AI correction could weigh on yields through growth concerns while potentially increasing Dollar demand if liquidity pressures intensify.

Dollar’s mixed performance on Monday suggests that none of these forces has yet established a convincing dominant direction. The coming days may change that balance, but the currency’s eventual response will depend on which transmission mechanism gains influence rather than on any single headline or predetermined risk-on or risk-off outcome.

Related Coverage

Central Banks and Gold

• RBA and BoE Hikes Largely Priced — Can GBP/AUD Escape Its Six-Month Range?: RBA and BoE are widely expected to raise rates this week, with markets pricing an 81.2% probability of an Australian hike and 94.4% for Britain. The real uncertainty lies beyond November, as investors anticipate limited additional RBA tightening but roughly 3.3 more BoE hikes afterward, leaving scope for repricing if policymakers challenge those expectations. GBP/AUD has traded between 1.8533 and 1.9360 for nearly six months, and while the meetings could trigger sharp moves, a sustained breakout may require a more fundamental shift in relative interest-rate outlooks.
• Gold Breaks Below $4,000 as Global Tightening and Liquidation Risks Converge — Is Today’s Bounce Just Relief?: Gold broke decisively below $4,000, extending its decline to approximately 30% from January’s peak of 5,598.75, as global monetary tightening pressures bullion and simultaneous losses across technology equities and precious metals raise concerns about liquidation-driven selling. Monday’s rebound toward $3,907 offers some relief, but falling Treasury yields have done little to halt the downtrend. Gold remains inside a falling channel with 3,748.81 the next downside objective, and a sustained breakdown could trigger accelerated selling toward 3,606.83 or lower, so the recovery may prove only temporary.

European Manufacturing PMIs

• UK PMI Manufacturing Climbs to 52.8 as Output Accelerates and Inflation Pressures Build: PMI Manufacturing rose from 51.9 to a five-month high of 52.8 in October, with production expanding at its fastest pace in 25 months on stronger domestic and overseas orders. Hiring stalled after six consecutive months of increases, while worsening supply disruptions pushed input inflation to one of its highest rates in four years and selling prices rose more quickly. Business confidence reached an eight-month high, but rising costs complicate the outlook ahead of the BoE’s policy decision.
• Eurozone PMI Manufacturing Eases to 52.7 as Growth Diverges and Cost Pressures Rise: PMI Manufacturing eased from 52.9 to 52.7 in October, but the headline concealed widening regional differences. Germany strengthened to 54.2, its second-highest reading in almost four-and-a-half years, while France slipped back into contraction at 49.5 and Italy also weakened. Output growth moderated despite export orders rising at their fastest pace in over four years, and stronger purchasing and precautionary inventory accumulation coincided with worsening supply delays and a five-month high in input inflation.

Asia-Pacific Manufacturing PMIs

• Japan PMI Manufacturing Eases to 53.3 as Momentum Cools but Capacity Pressures Persist: PMI Manufacturing declined from 54.1 to a seven-month low of 53.3 in October, with output and new orders recording their weakest growth since March, although semiconductor and AI-related demand continued supporting activity. Manufacturers maintained a strong hiring pace while backlogs increased more quickly, pointing to continued capacity pressures. Input inflation accelerated as higher oil, raw material and component costs prompted firms to build inventories at their fastest pace in almost four years, and business confidence reached an eight-month high.
• Australia PMI Manufacturing Stuck at 49.6 as Demand Weakens and Supply Costs Climb: PMI Manufacturing held at 49.6 in October, but new orders fell at their fastest pace since December 2024, driving another solid contraction in production. Shipment delays and port congestion pushed supplier delivery times to some of their longest since mid-2022, adding to shipping and raw material costs. Input inflation accelerated to its fastest since June and selling prices rose more quickly despite weaker demand, while business confidence improved slightly but stayed historically subdued.
• China PMI Manufacturing Holds Near 52 as Stronger Production Masks Pricing Weakness: RatingDog PMI Manufacturing edged down from 52.1 to 52.0 in October, with output growing at its fastest pace since April on solid new orders and continued export growth. Stronger production failed to translate into pricing power, however, as intense competition pushed factory-gate prices lower for the second time in three months even as input costs kept rising. Business confidence slipped to a nine-month low, suggesting stronger manufacturing activity is not necessarily delivering a more favourable operating environment.

FAQ

Why did Dollar lack direction on Monday despite higher Fed hike expectations?

Dollar Index slipped toward 101.66, weakening against Euro, Sterling and Swiss Franc while gaining against Yen, Australian Dollar and New Zealand Dollar, even though CME FedWatch put the probability of a December 25bps hike at 76.6%, up from 70.7% at Friday’s settlement. The 2-year yield stayed near 4.59% and the 10-year eased toward 4.92%, so the modest repricing generated no broad Dollar strength, and neither the retreat in Brent toward $108 nor the Fed pricing explains the uneven performance.

Why could the Senate result matter more than the House for markets?

A Democratic House is the prevailing expectation, with 96% of 138 investors in Wolfe Research’s October survey expecting it, so it may deliver little surprise. The Senate is less settled: 58% of investors anticipated Democratic control, while Wolfe’s own probability was close to 49%. Senate control also bears on divided government and debt-ceiling negotiations, and because senators confirm Federal Reserve appointments, a Democratic Senate could constrain nominations seen as threatening the central bank’s independence.

Which events could set Dollar’s direction this week?

Three catalysts are in focus: Tuesday’s US midterm elections, Friday’s employment report and further deterioration in AI-related equities and credit conditions, with Wednesday’s Treasury refunding announcement as another focal point. They work through different channels: fiscal expectations and longer-term yields for the election, the Fed’s next move for payrolls, and growth concerns or possible liquidity pressures for the AI correction. None carries a predetermined Dollar reaction.

Key Takeaways

1. Dollar Index slipped toward 101.66 on Monday, weakening against Euro, Sterling and Swiss Franc while gaining against Yen, Australian Dollar and New Zealand Dollar, with no dominant market-wide driver.
2. CME FedWatch put the December 25bps hike probability at 76.6%, up from 70.7% at Friday’s settlement, yet the 2-year yield held near 4.59% and the 10-year eased toward 4.92%.
3. Brent crude fell toward $108 on reports of Washington–Tehran diplomacy, but neither oil nor the Fed pricing explains the uneven currency performance.
4. A Democratic House is widely expected, with 96% of 138 investors in Wolfe’s survey, while the Senate is less settled at 58% of investors against Wolfe’s own probability near 49%.
5. Divided government could complicate debt-ceiling talks in a window the Bipartisan Policy Center places between late winter and mid-summer 2027, and Treasury yields may signal the fiscal reaction more clearly than Dollar.
6. October payrolls are expected at +56K after September’s 29K, with unemployment at 4.2% and earnings growth at 0.3% mom; weaker data could challenge the roughly 77% December hike probability.
7. AI-related risk aversion has lowered yields rather than lifted Dollar; S&P’s negative outlook on Meta shows scrutiny extending beyond valuations, and Dollar demand could rise if the correction becomes a funding or liquidity event.

What to Watch Next

The first test is the Treasury market’s response to Tuesday’s election, particularly the Senate result, followed by Wednesday’s refunding announcement and its planned auction sizes. Any reaction in longer-term yields may reveal the fiscal read-through before Dollar does.

Friday’s payrolls are the next gauge of whether the roughly 77% December hike probability holds, while credit developments and technology earnings will show whether the AI correction stays an equity story or turns into a funding or liquidity event. Developments in US policy toward Iran after the vote could also quickly move oil and inflation expectations.

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