Hedge Fund Adviser LB Macro Sees US Midterms Boosting the Dollar

Dollar bears may be misinterpreting the impact of US President Donald Trump’s setback in the midterm elections, according to a former head of strategy at Brevan Howard Asset Management.

Luigi Buttiglione, who left Brevan Howard in 2017 and now advises some of the world’s best-known hedge funds through his firm LB Macro SA, argues that a politically weaker Trump could ultimately lead to a more hawkish Federal Reserve and a stronger dollar.

His view contrasts with the market’s initial response to the Democratic sweep of Congress, which saw investors sell the dollar and buy Treasuries on expectations that a more constrained administration would mean less fiscal stimulus and lower inflation. The dollar steadied on Thursday after touching the lowest level in over a month earlier in the session.

“A weaker Trump should mean a stronger dollar,” said Buttiglione in an interview, adding that the greenback has previously weakened during bouts of concern over the president’s foreign-policy agenda, such as the imposition of tariffs against allies and adversaries alike, and his attempts to secure control of Greenland.

Lower energy prices, on market expectations that the midterm loss may accelerate efforts to end the Middle East war, could provide an additional boost to US stocks, he said. S&P futures advanced after the benchmark posted the biggest one-day jump in three months on Wednesday.

Read more: Trump’s Trouncing Gives Warsh More Room for Maneuver on Rates

The shift could also give Fed Chair Kevin Warsh more room to reassert his traditionally hawkish instincts and focus on reining in inflation with less political pressure to cut rates, according to Buttiglione.

Buttiglione said the economic divergence across the Atlantic will likely remain, with stronger US productivity growth supporting a more resilient economy and higher interest rates than in Europe. Traders are currently pricing two Fed interest-rate hikes by the middle of next year, with a 50% chance of a third.

More broadly, the Republican midterm collapse should ease investor anxiety around Trump’s unpredictable policies that have periodically weighed on US assets, according to Buttiglione.

“The result shows that US institutions continue to work,” he said. “Checks and balances are alive and kicking.”