The dollar fluctuated on Wednesday as traders anticipated the results of the U.S. midterm elections and inflation data that could deflate prospects for a slowing of rate hikes.
The main indexes on Wall Street had substantial daily gains, while the U.S. Dollar Index posted its lowest daily closing since Oct. 27 before entering a consolidation period at approximately 110.50 early Tuesday.
A final outcome to the midterm elections could take days, but predictions are for a Republican victory, at least in the House of Representatives, and consequent gridlock in Congress. According to some economists, if fiscal stimulus is reduced, the impact might be favorable for bonds but negative for the dollar.
U.S. stock index futures are currently trading flat for the day, which reflects a cautious market sentiment. The benchmark yield on U.S. Treasury bonds of 10 years remains stable at just over 4%.
While there is growing concern that this trend is coming to an end, the aggressive pace of U.S. rate hikes has increased U.S. Treasury yields and driven the dollar to multi-year highs against most major currencies.
On Tuesday, the euro reached $1.0031, its highest level in two weeks, before falling back to trade just below the $1 mark. Sterling dipped 0.43% to $1.14655, although it was still well off its recent lows, as were the riskier Australian dollar and currencies such as the Swedish crown, which often move in tandem with broader market sentiment.
As a result, the dollar index, which measures the currency's performance versus six major currencies, was at 110.4, down from 113.5 in the middle of last week.
Republicans are projected to gain control of the U.S. House of Representatives by gaining five additional seats. The vote for the U.S. Senate, on the other hand, is expected to be more competitive.
A risk rally could be seen in the U.S. stock markets if Republicans seize control of the U.S. Congress because they would prevent Democrats from enacting expansionary fiscal policies that could drive inflation further higher.
In that case, it would be difficult for the U.S. Dollar to continue to outperform its competitors, at least in the short term, and support EURUSD's upward movement.
On the other hand, a divided government with Democrats maintaining their majority in the U.S. Senate may compel investors to seek safety because that would make the fiscal policy even more unpredictable.
Although it is difficult to predict how the outcome of the U.S. midterm elections will affect the U.S. Federal Reserve's policy outlook, Wall Street's response may provide some insight into the USD's next move.
