Dollar flat as traders eye US midterms, potential partisan gridlock

WASHINGTON/LONDON: The dollar was flat on Tuesday as traders looked ahead to US midterm elections and hopes of China relaxing coronavirus restrictions faded, after initial optimism that boosted investor sentiment and weighed on the safe haven US currency.

A conclusive result to Tuesday’s midterms could take days, but forecasts are for a Republican victory, at least in the House of Representatives, and consequently likely gridlock in Congress. Some analysts said that outcome could be positive for bonds and negative for the dollar if it leads to less fiscal stimulus and a partisan impasse around increasing the debt limit.

“As we get into the early part of next year, when discussions about the debt ceiling appear slated to come back on the agenda again, that’s the point at which these sort of market risks will matter,” said Bipan Rai, North America head of FX Strategy at CIBC Capital Markets.

Republicans taking control of either one or both chambers of Congress also probably means lawmakers will face difficulty passing fiscal stimulus, with the likelihood that Federal Reserve Chair Jerome Powell “can afford to take the foot off the interest rate hike accelerator”, said Damien Boey, chief macro strategist at Barrenjoey in Sydney.

The US Federal Reserve’s rate-setting committee increased rates by 75 basis points last week and Powell indicated that hikes would continue, causing markets to reprice expectations of the point at which they would peak.

The dollar index, which tracks its performance against six major currencies, was at 110.19, down from as much as 113.5 in the middle of last week.

Another factor that has restrained the dollar in recent days was speculation that China might relax aspects of its dynamic zero-COVID policy.

China’s strict virus policy includes lockdowns, quarantining and rigorous testing, and officials said over the weekend the measures are “completely correct” and will stay. But incremental adjustments have been enough to stave off despair among traders.

The euro was down 0.09% to $1.001 on Tuesday, while sterling was last trading at $1.1473, down 0.33% on the day.

The Japanese yen strengthened 0.51% versus the dollar at 145.88 per greenback.

Japanese foreign currency reserves posted the second-sharpest monthly decline on record in October as authorities spent 6.35 trillion yen ($43.37 billion)intervening to support the yen.

The yuan had its best day in two years on Friday and has held most of those gains since, but gave back a little bit through Tuesday to trade at 7.2553 per dollar as fresh COVID-19 outbreaks chipped away at some of the optimism.

In cryptocurrencies, bitcoin fell more than 6% to $19,412 and ether dropped sharply in moves traders said were linked to concern for brokerage FTX, after rival Binance said it would liquidate holdings of FTX’s native token.