Dollar dips ahead of midterm elections, pushes euro up

NEW YORK (Reuters) - The dollar fell modestly on Monday after three straight weeks of gains, pushing up the euro, with investors anxious a day before the U.S. midterm congressional elections because of possible fallout on the economy.

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The Democrats are favoured to wrest control of the U.S. House of Representatives on Tuesday, and Republicans are expected to retain their majority in the Senate. That outcome would be a boon for the dollar, said analysts.

“We think a split Congress is the base case and favoured outcome for markets,” wrote analysts at Brown Brothers Harriman. They said such a scenario would maintain “the economic status quo” of tax cuts and reduced regulation while Democratic control of one chamber would provide “for some checks and balances on the Executive branch.”Single-party control of both chambers would be bad for the dollar, Brown Brothers Harriman said. Full Republican control could mean increased trade tension and a larger deficit, while full Democratic control could see a roll-back of the tax cuts and a more restrictive regulatory environment, the analysts said.

Market analysts warned that an unexpected outcome could trigger a massive unwind of long dollar positions and undermine the greenback, which has rallied more than 7 percent from April lows against its rivals.

“The midterms tomorrow and the Fed later in the week are significant enough in terms of event risk to keep investors sitting on their hands,” said Shaun Osborne, chief FX strategist, at Scotia Capital.

The Federal Reserve is holding a policy meeting on Wednesday and Thursday.

The dollar index was down 13.3 basis points, last at 96.313. Last week, it hit a June 2017 high of 97.20.

In the latest week ended Oct. 30, hedge funds added to their dollar holdings, bringing the value of net long dollar positions to $26.74 billion, the highest levels since December 2016.

The euro on Monday was up by 17.6 basis points, last at $1.141, helped by the softer dollar rather than Europe’s economic fundamentals. Friday’s strong U.S. jobs data brought into focus the diverging trends between a robust U.S. economy and its struggling European counterpart, with a Citibank economic monitor showing the European index near 2018 lows.

Sterling was up 23 basis points at $1.305 as expectations grew that Britain and the European Union are inching closer to a Brexit deal.

The currency was lifted by a report in Britain’s Sunday Times that an all-UK customs deal will be written into the legally binding agreement governing the country’s withdrawal from the European Union.

Reporting by Kate Duguid; Additional reporting by Saikat Chatterjee; Editing by David Gregorio and Leslie Adler