Dollar slips as U.S. midterm uncertainty drives caution across currency markets

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Dollar slips on midterm uncertainty

Highlights

The dollar index slips 0.2% to 101.7 and the euro rises 0.2% to $1.1212 as U.S. midterm results create market uncertainty.
Oil prices steady at $103.85 a barrel while markets monitor Middle East geopolitical risk and assess possible supply disruptions from Iran and Ukraine.
Sterling rises to $1.3440 as traders expect the Bank of England's first rate hike since August 2023 at Thursday's policy meeting.

Election results and market positioning

As reported by Reuters, the dollar falls against most major currencies on Wednesday as the first U.S. midterm election results begin to emerge and markets brace for a potentially strong Democratic performance.

Democratic Senator Jon Ossoff wins reelection in Georgia in the first major race to be called, while the broader question of whether Democrats can take control of Congress from Donald Trump's Republicans remains unresolved for hours. By 7:30 p.m. ET, U.S. media outlets project winners in only a handful of House races after polls close in 10 states, with voting still under way across much of the country.

The euro firms 0.2% to $1.1212, while the yen strengthens to 158.30 per U.S. dollar in early trading. The dollar index, which tracks the greenback against a basket of six currencies, edges down 0.2% to 101.7, while the yield on the benchmark U.S. 10-year Treasury note falls 4 basis points to 4.919%.

Carol Kong, currency strategist at Commonwealth Bank of Australia, says markets currently favour a Democratic victory in both the House and the Senate. She says such an outcome could trigger a further dollar selloff because a Democratic sweep would limit government spending over Trump's term.

Oil risk and central bank focus

Investors are also watching whether the election outcome could affect geopolitical risk in the Middle East. Kong says markets are closely monitoring the possibility of a renewed bombing campaign in Iran if Republicans lose control of both chambers, a scenario that could lift oil prices sharply and in turn support the U.S. dollar.

Oil prices are little changed at $103.85 a barrel after slipping about 1% on Tuesday to their lowest level in nearly four weeks. The market is weighing talks to end the wars in Iran and Ukraine against concerns that recent attacks in both conflicts could further disrupt supply.

Sterling edges higher to $1.3440 as traders look ahead to the Bank of England's policy decision on Thursday. The Monetary Policy Committee is expected to raise interest rates for the first time since August 2023.

China's offshore yuan last trades at 6.6673 per dollar, stabilising after its biggest one-day fall since May 15 on Tuesday. The move follows a decision by the People's Bank of China to raise the amount of foreign currency that financial institutions must hold in reserve, an effort to slow the yuan's rally.

In our earlier article on soaring oil shipping and tanker freight costs, we explained how conflict-related risks are pushing up the cost of moving crude through key routes such as the Strait of Hormuz and the Red Sea. We noted that higher freight and insurance premiums are increasingly becoming a meaningful part of oil pricing, with knock-on effects that can filter through to fuel and consumer prices and hit import-dependent markets hardest.

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