The U.S. dollar weakened against its major rivals on Wednesday as investors digested the results of the U.S. midterm election in which the Democrats took control of the House of Representatives.
The greenback’s weakness on the back of a Democratic victory was expected, reflecting skepticism that the stimulus bonanza, including further tax cuts, that had fueled the dollar’s rally in the first half of the year, would continue under a split Congress.
“So far, the reaction of the markets to the outcome of the U.S. midterm elections has generally been how we had envisaged: the U.S. dollar and bond yields coming under pressure and gold gaining ground,” wrote Fawad Razaqzada, market analyst at Forex.com.
The ICE U.S. Dollar Index DXY, -0.34% which compares the buck against six rivals, was down 0.6% at 95.727, representing a 2.5-week low.
The dollar’s biggest rival, the euro EURUSD, +0.3238% rose in lockstep, last buying $1.1494, up from $1.1427 late Tuesday. Similarly, the British pound GBPUSD, +0.3054% was also stronger, fetching $1.3168 versus $1.3099.
Against the Japanese yen USDJPY, -0.11% the buck slipped to ¥113.13, from ¥113.43.
Emerging-market currencies also rode the wave of the weak buck and strengthened against the dollar, with the South African rand USDZAR, -0.8001% leading the field.
Now, attention will shift to the Federal Reserve. The central bank’s November policy meeting is set to kick off later Wednesday, with its policy statement scheduled to be released at 2 p.m. Eastern on Thursday.
“Although the Fed will most likely still go on to hike interest rates for the fourth time this year in December, the reaction of the markets suggests that investors are perhaps expecting future inflationary pressures to just easy slightly under a divided government,” Razaqzada said.
President Donald Trump’s “plan to further cut taxes and raise government spending may be difficult to pass now. This may mean slightly less aggressive Fed rate hikes in the future than would have been the case had the Republicans retained control of both houses,” he said.
Higher interest rates commonly make a local currency and other assets more attractive.