On the day of the US midterm elections, the dollar strengthened, and the rise in treasury bond yields provided support for the US and Iran situation or dominated future market trends

The Zhitong Finance App learned that the US dollar strengthened during the US midterm election voting period on Tuesday, boosted by rising US Treasury yields and steady economic data performance. However, as diplomatic negotiations between the US and Iran show positive signs, fluctuations in international oil prices are becoming an important factor affecting the short-term trend of the US dollar. Analysts believe that compared to the midterm election results, the subsequent development of the US-Iran conflict and the Trump administration's policy stance may have a more significant impact on the US dollar.

The Bloomberg Dollar Spot Index rose 0.2% on Tuesday, hovering near its highest level since this year. The index hit an annual high last month. At that time, US inflation data continued to be high, driving the market to raise expectations for further interest rate hikes by the Federal Reserve and providing strong support for the US dollar.

At the same time, economic data recently released by the US also showed strong resilience. According to data released by the American Institute for Supply Management (ISM) on Monday, the manufacturing purchasing managers' index (PMI) rose to 55.5 in October, the second highest level in more than four years, and the manufacturing production growth rate reached the fastest level since 2021. Strong data on economic activity, combined with a recovery in US Treasury yields, further strengthened the attractiveness of the US dollar.

However, this week's market trends indicate that changes in international oil prices and US-Iran relations may become key factors dominating the US dollar's performance in the next few days. On Monday, as both the US and Iran sent signals that they are willing to resolve the conflict through negotiations, international oil prices fell sharply, and the US dollar weakened as well. On Tuesday's intraday, as signs of progress in negotiations between the two sides increased and reports that Trump wanted more time for diplomatic negotiations came out, the dollar once again followed the fall in oil prices.

This trend highlights the increasing sensitivity of the US dollar to changes in oil prices against the backdrop of the ongoing conflict in the Middle East driving up energy prices and US inflation.

Sarah Ying, head of foreign exchange strategy at the Canadian Imperial Bank of Commerce (CIBC), pointed out in a report that for the US dollar, oil prices are still the most noteworthy short-term driver. She said, “For the US dollar, oil prices are still the most important short-term observation indicator. Any sharp fluctuation is likely to overshadow the impact of the US midterm elections.”

Ying believes that given the Trump administration's moderate rhetoric on the Iran issue in recent days, investors can consider planning a fall in the dollar. However, at the same time, she warned that the US government's position may change after the midterm elections are over.

In fact, as the midterm elections approach, the forex options market's bets on a further rise in the US dollar have weakened.

According to the Bloomberg Dollar Index's one-cycle risk reversal indicator, the premium paid by traders for bullish dollar options has fallen to its lowest level since September, indicating a decline in market confidence in the short-term rise of the dollar.

Risk reversal indicators are commonly used to measure the market's relative pricing of the risk of rising and falling exchange rates. The narrowing of call option premiums means that investors' willingness to pay additional costs to prevent the dollar from rising is weakening.

CIBC's analysis also shows that judging from the implied volatility of the foreign exchange market, traders currently give risk weight to the US midterm elections, which is roughly equivalent to an ordinary US Consumer Price Index (CPI) report.

This means that although the midterm elections may influence the future policy direction of the US, the foreign exchange market did not regard it as a major risk event sufficient to trigger sharp fluctuations in the US dollar alone.

In contrast, investors are more concerned about what kind of policies Trump will adopt after the election, especially America's military and diplomatic stance on Iran, and the progress of future trade negotiations. “More noteworthy is Trump's policy agenda after the midterm elections, particularly the Iran issue and trade negotiations,” Ying said.