Oct 06, 2023 Americas

A House without a Speaker

Chaos on Capitol Hill is likely to have surprisingly benign consequences for the dollar.

“McCarthy Is Ousted as Speaker, Leaving the House in Chaos”, newspaper headlines trumpeted on Wednesday morning, after the latest bit of U.S. political drama.[1] One might therefore expect the dollar to be taking a beating. The opposite is once again likely to be the case.

To recall, earlier in the year, the heated debt ceiling fight dragged on for months. When a solution was finally found, the Treasury Department had to increase the volume of pent-up bond issues on the market. Treasury yields began to rise sharply. The struggles on Capitol Hill also reminded financial market participants of the huge mountain of federal government debt, amounting to about 120% of gross domestic product.[2] That needs to be refinanced and higher long-term interest rates in part reflect the need to attract foreign capital. In turn, higher Treasury yield push the dollar higher. Against the euro, for example, the U.S. currency has steadily been gaining ground, inching closer to parity, to levels last seen in late 2022. Nor is it just a case of euro weakness. As our Chart of the Week shows, a similar pattern holds for the greenback against a trade-weighted currency basket.

Most recently, 10-year yields on U.S. Treasuries' main driver for the dollar


Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 10/04/23

Lately, 10-year Treasury yields have mostly been driving the trade-weighted dollar. Such patterns tend to come in phases. Not so long ago, it was the short-term rates that held sway. Indeed, growing market expectations that U.S. interest rates are likely to stay high for quite a while suggest the dollar could get stronger still, no matter what happens in Washington. Especially if growth elsewhere continues to weaken. 

As for the House Speaker, no parliamentary business can get done until a new one is elected. Having passed a continuing resolution at the last minute just before the ousting of the Speaker, stopgap funding is now in place until mid-November. One (or more) shutdown(s) beyond that remain distinct possibilities. But with next year’s election looming, time is starting to run short for Republicans to pass any of their spending priorities, not to mention other items dear to some members, such as investigating the Biden administration. We expect a new Speaker to emerge, after prolonged wrangling but in time for November.

Beyond that, the greenback’s position in international trade and finance remains entrenched, but perennial discussions about de-dollarization are once again resurfacing.[3] And to be sure, Congress will need to act eventually on entitlement reform, taxes, discretionary spending or probably all three, given the long-term U.S.-fiscal outlook. That, though, is likely to wait, at least until after the next election. “In the meantime, high interest rates in the U.S. lead to a stronger dollar, which in turn leads to an outflow of capital from other countries. If the Fed is right about “higher for longer,” the impact on the global economy could be long-lasting and profound,” argues Dr. Xueming Song, currency strategist at DWS.

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