Uncertainty following the U.S. mid-term elections could cause a 13 per cent plunge in the Australian dollar and make petrol, cars, electronics and overseas holidays much dearer.

American President Joe Biden‘s power to pass legislation is in trouble with the Republican Party set to take back control of the House of Representatives.

Westpac fears the Republicans in the US Congress could block American government spending, which has the potential to cause the Australian dollar to fall to 58 US cents next year – a 13 per cent drop from 67 US cents now. 

The Republican Party’s projected gain of seven seats, so far, is significantly less than opinion polls had predicted with inflation close to the highest level in four decades.

But with President Biden’s Democrats set to lack a majority in the lower house, the Republican Party would have the power to block legislation and spending programs.

The Republicans are so far on track to win at least seven seats, with 212 electorates so far in their column, compared with 205 for the Democrats, Real Clear Politics data showed.

Counting is continuing in 18 races but if present trends continue, the Republicans are likely to have at least 218 seats for a majority in the 435-seat House of Representatives.

Westpac senior currency strategist Sean Callow said the highly-partisan Republicans could use their power to block American government spending.

The Republicans in 2011 used their numbers in the House of Representatives to force a government shutdown by refusing to raise the debt ceiling when Barack Obama was Democrat president.

Should the same thing happen again in 2023, Mr Callow said this could cause the Australian dollar to plunge below 60 US cents. 

‘If some of the more negative scenarios play out, then I do think we’re probably heading back to the high 50s – it could be 58, 59 cents,’  he told Daily Mail Australia.

‘If we are in for this sort of showdown, a game of chicken, then that could be really upsetting for financial markets – it does tend to spill over to the Aussie.

‘The Aussie is very much a good times currency so when things take a turn for the worst, then the Aussie dollar gets hit harder.’

A weaker Australian dollar, now at 67 US cents, would make petrol prices much dearer, with motorists in Sydney and Melbourne already paying $2 a litre again for unleaded.

‘It can be very noticeable in petrol prices, that’s one that gets passed through quite quickly and they’re priced in US dollars,’ Mr Callow said. 

Cars and electronic equipment like televisions would also become more expensive, a bit later, with those goods often ordered in bulk months in advance. 

‘In a higher inflation environment, they’re far more likely to pass through those cost increases to the consumer,’ Mr Callow said.

The Australian dollar’s fortunes are tied to global risk appetite, or sentiment on financial markets, more so than to commodity prices during a time of high global inflation.

‘There are still lots of hurdles ahead: global energy prices, war, how does China continue to deal with Covid? There are lots of reasons to be concerned about risk appetite,’ Mr Callow said.

‘They would definitely weigh on the Aussie if that comes to fruition.’ 

The US Democrats look set to retain control of the Senate, which means the Republicans on their own would lack the power to block President Biden’s potential appointments to the Supreme Court. 

But the Republicans controlling the House of Representatives means the Australian dollar weakens, making imports more expensive, with inflation already at a 32-year high of 7.3 per cent. 

Petrol prices surged by 18 per cent in the year to September.