The US dollar fell to its lowest level in a month on Wednesday, as Democratic control of Congress following the midterm elections raised concerns about tighter regulation of the artificial intelligence sector, potentially weighing on US economic growth.
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The dollar also came under pressure from declining US Treasury yields, as investors turned to the safe-haven appeal of government bonds while assessing the implications of the political developments in Washington. Traders also scaled back expectations of interest rate hikes next year.
The euro rose 0.6% to $1.1258, while the US dollar index, which measures the greenback against a basket of six major currencies, fell 0.6% to 101.27, its lowest level in a month.
The yield on benchmark 10-year US Treasury bonds declined by around five basis points to 4.915%.
The dollar's decline was particularly pronounced against the Japanese yen and Swiss franc, both considered safe-haven currencies. The dollar fell 0.6% against the Swiss franc to 0.8159, while the yen strengthened by around 0.8% to 157.92 per dollar.
Democrats secured majorities in both the Senate and House of Representatives, recording sweeping victories that extended into Republican strongholds such as Kansas and Texas. The results amounted to a strong rebuke of President Donald Trump by tens of millions of voters.
Democrats also flipped Republican Senate seats, securing a majority even if they failed to retain Minnesota.
For some analysts, however, the more significant issue for the dollar is what the Democratic victory could mean for the artificial intelligence industry.
Mo Seong Sim, a currency analyst at OCBC, said market movements reflected concerns that a sweeping Democratic victory could lead to tighter oversight of artificial intelligence. He pointed to the Nasdaq's weak performance and concerns about US economic growth if the sector faces additional regulatory restrictions.
Sim also noted that even a major Democratic victory would not necessarily make federal legislation easy to pass, given the significant obstacles under President Trump, who retains veto power.
Carol Kong, a currency strategist at the Commonwealth Bank of Australia, said investors would return their focus to the fundamental economic factors influencing the US dollar once the midterm elections were over.
She said US economic data would likely continue to point to a strong economy, supporting further interest rate increases and, in turn, the dollar.
Kong added that she was also monitoring the risk of an escalation in the Middle East following the election results, particularly after Trump declined to rule out resuming US military operations after the midterm elections.
"If he escalates aggression in the conflict, we could see a sharp jump in oil prices, which would also support the US dollar," she said.
Oil prices edged lower to $102.90 a barrel after falling around 1% on Tuesday to their lowest level in nearly four weeks.
Sterling rose 0.3% to $1.3458, as traders awaited the Bank of England's monetary policy announcement on Thursday. The bank's Monetary Policy Committee is expected to raise interest rates for the first time since August 2023.
Meanwhile, the offshore Chinese yuan was last trading at 6.6836 per dollar, down 0.2%, extending its losses after recording its biggest daily decline since May 15 on Tuesday. The move followed a decision by the People's Bank of China to raise the foreign exchange reserve requirement ratio for financial institutions, in a measure aimed at slowing the yuan's appreciation.
Source: Reuters
