NEW YORK (Reuters) - The U.S. dollar gained against a basket of currencies on Wednesday after Democrats looked unlikely to take control of the U.S. Senate, leading investors to unwind bets that a large fiscal package is likely.
Democrat Joe Biden held a narrow lead in Wisconsin on Wednesday after officials completed their vote count in the pivotal state, a major boost in his quest to win the U.S. presidency from Donald Trump.
A so-called “blue wave” of votes for Democrats did not emerge as many had expected, however, making it likely that Republicans will maintain control of the U.S. Senate, and oppose any massive stimulus spending increase.
“It’s going to be really tough to get additional stimulus going if we do have a Republican Senate,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto. “If that is the case I would think that some of these ‘blue wave’ trades need to be unwound. Now what that means for the dollar is that we’re probably looking for a short squeeze.”
The dollar index rose 0.27% to 93.39, after reaching a one-month high of 94.31 overnight.
The euro gained 0.09% to $1.1722, after dropping to $1.1602, its lowest since July 24.
The greenback was little changed against the Japanese yen at 104.44 yen.
The offshore yuan hit a more than two-year high of 6.6190 against the dollar on Wednesday afternoon as Biden appeared to take the lead in the election. The yuan had weakened to a one-month low of 6.7741 in overnight trading.
Exceptionally heavy trading Tuesday night between the dollar and yuan drove volumes in world markets, said Troy Rohrbaugh, global head of markets for JPMorgan Chase & Co.
Foreign exchange volume in Asia was three to four times the daily average, he said. “China is one of the key political topics that will be determined by the election,” Rohbraugh said.
The yuan has been heavily affected by Sino-U.S. disputes since the outbreak of the bilateral trade war in 2018.
Risk appetite was strong on Wednesday, with stocks rising, which likely limited the dollar rally.
The prospect of legal challenges over the election result, however, may still dampen risk taking in the coming days or weeks, which would likely lift the greenback further.
“The contested election outcome and this going to the courts, that is what I think everyone does not want,” said Edward Moya, senior market analyst at OANDA in New York. “If you don’t have that certainty then you’re going to eventually see that risk aversion will persist like we saw in 2000.”
Trump’s campaign said on Wednesday it would seek a recount of votes in Wisconsin, hours before CNN and the Associated Press projected Biden had won the key battleground state’s 10 electoral college votes.
Additional reporting by David Henry in New York; Editing by Marguerita Choy and Richard Chang
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