The dollar eased towards six-week lows against the euro on Wednesday but falls were limited as investors speculated no major policy shift was likely after the Democrats took control of the US House of Representatives.
The battle for the Senate still hangs in the balance but traders said currency markets were very much taking the US political situation in their stride. An absence of major economic data in the session also left major currencies holding in ranges.
Instead, a drip-feed of news and policymakers' comments combined to keep the dollar under broad pressure. They include market speculation on whether China wants to trim its dollar share of its $1 trillion foreign exchange reserves, reaction to a Fed official's press interview on Wednesday and broad expectations that the Bank of Japan and European Central Bank are both likely to raise interest rates again in the coming months.
"You've got the Chinese reserves debate, slight signs of potential division in the Fed, political gridlock in the US, a hawkish BoJ and ECB ... bits and pieces that are all adding up to a weak dollar story," said Simon Derrick, head of currency strategy at The Bank of New York in London.
Currency strategists at UBS also noted technical factors and the decline in US bond yields and narrowing of spreads over the last couple of days, which has put the dollar back under selling pressure.
At 1245 GMT, the euro was up 0.1 percent on the day at $1.2787, near its six-week high of $1.2819 on Tuesday. The dollar was down 0.1 percent against the yen at 117.57 yen. The euro was flat at 150.40 yen, around half a yen off its record high.
The Australian dollar fell to $0.7695, erasing gains made after the Reserve Bank of Australia earlier raised rates as expected to 6.25 percent. Analysts say comments from the RBA, which left open the question of more rate hikes, were not sufficiently hawkish to lift the Aussie further.
While being a major topic of debate on trading floors for several sessions, the US midterm elections had little immediate impact on the currency market. "The market has taken this with relative calm; political uncertainty doesn't help a currency and the dollar has weakened but at the same time euro/dollar is still nicely settled in a fairly well constructed $1.25/1.30 range," GNI currency strategist Mark Henry said.
"This sort of news isn't strong enough to push the euro out of that comfort zone...The bigger moves we might see are going to come from the economic side of things and in particular the interest rate differential story," he added. The Democrats were moving to the brink of capturing the Senate, but their final victory could be delayed by a possible recount in Virgina.
Analysts said the Democrats' victory in the House was likely to the brakes on Bush's legislative agenda in his final two years in office. Meanwhile, BoJ Policy Board member Atsushi Mizuno suggested that Japanese interest rates will rise, albeit gradually, so long as the economy grows in line with BoJ expectations.
Markets generally expect the BoJ to raise rates some time in the first quarter of next year from 0.25 percent currently, with any indication they could rise faster boosting the low-yielding yen. And Richmond Fed President Jeffrey Lacker told the Financial Times on Wednesday that the US central bank had failed to emphasise its desire for lower inflation.
He said inflation risks have persisted because "we have not communicated very strongly that we want inflation to be lower and would be willing to take action to bring that about." Lacker has three times opposed the Federal Reserve's decision to hold rates steady at 5.25 percent.
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