On Thursday the dollar traded in a narrow range versus major peers as investors took in the U.S. midterm election results, and turned their focus to the Federal Reserve’s monetary tightening path.
The election results were as the market expected; a split Congress with Democrats winning control of the House of Representatives and Republicans cementing their majority in the Senate.
Traders initially reacted to this result by selling the dollar on Wednesday as the likelihood of further fiscal stimulus faded.
However, the dollar recouped most of its losses versus the euro and yen by the U.S. close as focus shifted away from politics to the Fed’s monetary policy.
The central bank’s Federal Open Market Committee (FOMC) is due to release its latest policy decision on Thursday after a two-day meeting.
The Fed has raised rates three times this year as the U.S. economy boomed and inflation started to pick up. It has signaled a rate rise in December, with two more hikes by mid-2019.
“The dollar is likely to benefit as we still expect the Fed to maintain its hawkish stance. The U.S. economy needs rising rates as wage pressures are building and there is a risk of an overheating of the economy,” said Sim Moh Siong, currency strategist at Bank of Singapore.
The dollar index, a gauge of its value versus six major peers traded at 96.19 on Thursday, gaining 0.21 percent.
On Wednesday the dollar strengthened 0.1 versus the yen to trade at 113.61. The dollar has gained around 1.9 percent over the Japanese currency over the last nine trading sessions due to the diverging monetary policies of the U.S. Fed and the Bank of Japan (BoJ).
While the Fed is on track to raise interest rates the Bank of Japan will press on with ultra loose monetary policy because of low growth and inflation.
The widening interest rate differential between U.S. and Japanese bonds has made the dollar a more attractive bet than the yen, which is often a funding currency for carry trades.
The euro traded at $1.1429 on Thursday. The single currency had touched an intraday high of $1.15 on Wednesday, due to dollar weakness rather than any substantial improvements in the euro zone’s economic fundamentals.
The standoff between the EU and Rome over Italy’s budget deficit and concerns over Europe’s slowing economic growth have dragged the euro which has fallen 4 percent versus the dollar over the last six months.
The pound traded flat at $1.3124 in early Asian trade after gaining 3.36 percent versus the dollar in the last six trading sessions, as traders bet a Brexit agreement was close.
The New Zealand dollar traded 0.15 percent lower versus the greenback at $0.6776. The central bank kept rates on hold at 1.75 percent on Thursday.
The Australian dollar traded marginally lower at $0.7272 on Thursday after gaining on the greenback over the previous three trading sessions.
However, traders expect upside in the Aussie dollar will be limited by rising trade tensions between the United States and China, Australia’s major trading partner.