The US strengthens the dollar on midterm election day, rising Treasury yields provide support, and the US-Iran situation may dominate future market trends.

According to information from Zhihui Finance APP, the US dollar strengthened on Tuesday during the US mid-term election voting period, supported by the rise in US Treasury yields and solid economic data performance. However, with positive signs emerging in diplomatic negotiations between the US and Iran, fluctuations in international oil prices have become an important factor affecting the short-term trend of the US dollar. Analysts believe that compared to the outcome of the mid-term elections, the subsequent development of US-Iran conflict and the policy stance of the Trump administration may have a more significant impact on the US dollar.

The Bloomberg Dollar Spot Index rose by 0.2% on Tuesday, hovering near its high for the year. The index reached an annual high last month when persistently high US inflation data fueled expectations for further rate hikes by the Federal Reserve, providing strong support for the US dollar.

At the same time, recent US economic data have also shown considerable resilience. Data released Monday by the Institute for Supply Management (ISM) showed that the October Manufacturing Purchasing Managers Index (PMI) rose to 55.5, marking the second-highest level in over four years, with manufacturing output growth reaching its fastest pace since 2021. Strong economic activity data, together with the rebound in US Treasury yields, further enhanced the appeal of the US dollar.

However, this week's market movements indicate that international oil prices and changes in US-Iran relations could become key factors dominating the US dollar's performance in the coming days. On Monday, as both the US and Iran signaled willingness to resolve conflicts through negotiations, international oil prices fell sharply, and the US dollar weakened as well. During Tuesday's trading session, as further signs of progress in negotiations emerged and reports suggested that Trump hoped to allow more time for diplomatic talks, the dollar once again declined along with oil prices.

This trend highlights that, against the backdrop of ongoing Middle East conflicts driving up energy prices and US inflation, the US dollar's sensitivity to oil price changes is increasing.

Sarah Ying, head of foreign exchange strategy at Canadian Imperial Bank of Commerce (CIBC), pointed out in a report that for the US dollar, oil prices remain the most important short-term driving factor at present. She stated: "For the US dollar, oil prices are still the most important short-term observation indicator, and any sharp fluctuation is likely to overshadow the impact of the US mid-term elections."

Ying believes that given the Trump administration's more moderate rhetoric on the Iran issue in recent days, investors can consider positioning for a decline in the US dollar. However, she also reminded that the US government's stance may change after the end of the mid-term elections.

In fact, as the mid-term elections approach, bets on further appreciation of the US dollar in the foreign exchange options market have also weakened.

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

The risk reversal indicator is commonly used to measure the relative pricing of upward and downward exchange rate risks. A narrowing of the call option premium means that investors' willingness to pay additional costs to guard against a rise in the US dollar is waning.

CIBC’s analysis also shows that, in terms of implied volatility in the foreign exchange market, traders currently assign the risk weight of the US mid-term elections at roughly the same level as a standard US Consumer Price Index (CPI) report.

This means that while the mid-term elections may affect the future course of US policy, the foreign exchange market does not view it as a major risk event sufficient to trigger sharp volatility in the US dollar on its own.

In contrast, investors are paying more attention to what policies Trump will adopt after the elections, particularly the US military and diplomatic positions on Iran, as well as the progress of future trade negotiations. Ying stated: “The more noteworthy factor is Trump’s policy agenda after the mid-term elections, especially the Iran issue and trade negotiations.”