NEW YORK (Reuters) - The dollar cut its losses on Wednesday as investors further digested the results of the U.S. midterm congressional elections, after an initial sell-off on expectations that the outcome would make further fiscal stimulus measures unlikely.
The elections delivered the most expected outcome: split control of the U.S. Congress, with Democrats winning control of the House of Representatives and Republicans cementing their majority in the Senate.
“There was this expectation that if we didn’t get a divided Congress, we might see risk sentiment becoming a little shaky, but since that didn’t happen we have a risk-on move,” said Mazen Issa, senior foreign exchange strategist at TD Securities in New York.
Market watchers believe the divided Congress will make further tax cuts and deregulation unlikely for now, which contributed to the dollar’s early fall.
The greenback has been the surprise winner in the global currency markets this year after Republicans pushed through President Donald Trump’s significant tax cuts, and strong economic growth prompted the Federal Reserve to steadily raise interest rates.
By Wednesday afternoon, the focus was turning to the Fed, with the U.S. central bank’s Federal Open Market Committee (FOMC) due to release its policy decision on Thursday at the end of a two-day meeting
“I think traders are squaring positions ahead of tomorrow’s FOMC decision,” said John Doyle, vice president of dealing and trading at Tempus Consulting.
The Fed is expected to hold rates steady on Thursday, but the language in the policy statement will be watched closely. Fed Chair Jerome Powell is widely expected to raise interest rates in December, which would be the fourth rate hike this year, as U.S. economic fundamentals remain strong.
“The Fed will likely raise rates next month, but that is already priced in so will not likely add any additional support to the dollar,” said Doyle.
Against a basket of six other currencies , the dollar fell 0.13 percent to 96.196.
Equity markets rallied as investors pushed funds into riskier assets, with the Dow and the S&P 500 index each closing up more than 2 percent on the day.
The euro was last up 0.05 percent at $1.143. Earlier, the single currency was up more than 1 percent above this year’s trough of $1.1301, reached on Aug. 15.
“It was our belief that the U.S. dollar move last month was overdone and the greenback is now searching for a new, slightly weaker range against the euro and a handful of other European currencies,” Doyle said.
Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
(This story corrects headline and lead to say that dollar cut losses, not that the dollar rose; corrects figures on dollar index to “fell 0.13 percent to 96.196,” not up 3.9 basis points at 96.031” in 10th paragraph and corrects to say “The euro was last up 0.05 percent at $1.143,” not “The euro was last up 24 basis points at $1.145” in 12th paragraph.)
Reporting by Kate Duguid; Additional reporting by Saikat Chatterjee; Editing by David Gregorio and Leslie Adler