Blog By David Stritch, Senior Multicurrency Analyst, Caxton | October 23rd 2026
The US dollar is weakening even though Brent crude has climbed to around $113 a barrel, its highest level since May. With US midterm elections less than two weeks away, prediction markets now see a Democratic sweep of Congress as the most likely result. Markets are treating that as a reason to expect lower US inflation, lower interest rates and a softer dollar.
Oil keeps rising, but the dollar has stopped rising with it. Brent crude is trading around $113 a barrel this week, driven by renewed attacks on shipping and energy infrastructure in the Gulf. The US Dollar Index, which measures the dollar against six major currencies, has slipped back from the 18-month high it reached earlier in October.
When the conflict in the Gulf began nearly nine months ago, the relationship was simple. The US is the world’s largest oil producer, so higher oil prices meant stronger US export earnings and a near-certain rise in US inflation. Higher inflation meant higher expected interest rates, and higher rates meant a stronger dollar.
That link is now breaking down, and the reason is political.
Markets increasingly expect a divided government, and that changes the inflation outlook. Polymarket currently gives Democrats around a 69% chance of winning both houses of Congress on 3 November, with the House seen as close to certain and the Senate as the closer contest.
If that happens, a split between the White House and Congress would very likely mean gridlock in Washington. Two consequences matter for currency markets:
Both outcomes are disinflationary for the US. If inflation expectations fall, so do expectations for the Federal Reserve’s base rate, which markets currently see sitting close to 5% this time next year. The dollar tends to follow rate expectations quickly.
There is room for a correction. The Dollar Index is trading around 2% above its year-to-date average. That figure is partly flattered by continued weakness in the euro, which makes up the largest share of the index. Pressure on French government borrowing costs has added to the euro’s problems this week.
In other words, some of the dollar’s strength reflects other currencies’ weakness rather than US resilience. That makes it more exposed if the domestic US story turns against it.
The next two weeks are crowded. The Federal Reserve announces its next rate decision on 28 October, with the European Central Bank the following day. The midterms take place on 3 November.
Some analysts have already sketched out what a Democratic sweep could mean. Bank of America has suggested it could trigger a pullback in US equities alongside a softer dollar. Oil remains the wild card. Any escalation in the Gulf could pull safe-haven demand back towards the dollar, even with the political picture shifting.
The next fortnight could bring sharp moves in the dollar in either direction, so timing matters more than usual.
A forward contract, which fixes an exchange rate today for a payment at a later date, is one way to remove that uncertainty. Rate alerts can help you act quickly if the market moves to a level you are targeting.
My read is that the oil-dollar link is not broken, but it has been overtaken. For most of this year, oil was the story. Now the market is looking past the next tanker headline to the next two years of US policy, and it does not like what gridlock means for US rates. Unless the Gulf escalates significantly, I think the balance of risk for the dollar leans lower into the election. That said, markets have been wrong on elections before. Anyone with a large dollar exposure should be planning for both outcomes, not just the one in the polls.
Why doesn’t higher oil strengthen the dollar anymore?
Higher oil usually lifts the dollar by pushing up US inflation and rate expectations. Right now, markets are more focused on how a divided Congress could lower inflation over the longer term, which outweighs the short-term effect of oil.
What would a Democratic sweep mean for the dollar?
Markets expect it would lead to gridlock, slowing tax cuts and possibly easing the conflict with Iran. Both would reduce inflation pressure and rate expectations, and the dollar would likely weaken as a result. That is a market expectation, not a certainty.
When are the US midterm elections?
The midterms take place on Tuesday 3 November 2026. Results may take several days to finalise in close races, so volatility could continue after election night.
Could the dollar strengthen instead?
Yes. A serious escalation in the Gulf, an unexpected election result or a hawkish Federal Reserve on 28 October could all send the dollar higher.
How can I protect a dollar payment from election volatility?
Options include fixing a rate in advance with a forward contract or setting rate alerts at levels that work for your budget. A multicurrency dealer can talk you through which suits your timing.
If you have dollar payments or receipts coming up in the next few weeks, now is a good time to talk to Caxton’s multicurrency dealers about fixing a rate or setting alerts before the election. For the UK picture, join our pre-Budget briefing: [Caxton 2026 UK Budget briefing link].
This article is for information only and does not constitute financial advice. Exchange rates can move quickly and past performance is not a guide to future performance.