Dollar losses accelerate as US stimulus hopes wipe out

LONDON (Reuters) – Dollar losses accelerated on Wednesday with the index down 0.5% from its major rivals. The result of the split in the US Congress has raised fears of a major economic revival of the US economy.

The greenback was the surprise surprise in the global currency markets this year, thanks to President Donald Trump's fiscal stimulus and strong economic statistics that forced the US Federal Reserve to report higher interest rates.

But market observers believe that the outcome of the mid-term negotiations in the United States, with House Democrats and Republicans retaining control of the Senate, makes any revival of US policy difficult. Trump's policies could also be subject to further scrutiny, fueling further political uncertainty.

Prospects for less fiscal stimulus would also ease pressure on the Fed to continue to raise interest rates and add downward pressure on US Treasury and dollar yields. The yield on US debt declined by 3 to 5 basis points overall.

The swap markets are currently expecting cumulative rate hikes of about 65 basis points until September 2019, but traders say the decline could continue if bond yields continue to decline.

"It is increasingly assumed that the leeway for another dose of stimulation for the Trump administration will be very limited and the dollar will go down," said Piotr Matys, currency strategist at Rabobank in London.

Against a basket of rivals, the dollar fell 0.5% to 95.758, its lowest level in more than two weeks. The yield on 10-year US Treasury bonds declined four basis points to 3.18%.

Despite the prospect of increased US policy uncertainty in the near term, equities rallied in the hope that the reduced likelihood of further fiscal stimulus would put an end to a multi-year US exchange rate cycle. years.

Gavekal's strategists said the US political stalemate could prove better for the markets than if the Republicans had another free kick.

"This would have given a boost to the budget, but it could also have led to a rise in interest rates, a big concern for equity investors," they said in a note.

High-yielding currencies such as the Australian dollar and the New Zealand dollar were firm, while safe-haven currencies, such as the Japanese yen and the Swiss franc, fell.

However, some market players felt that domestic political uncertainty could push Trump to reinforce trade tensions with China. The offshore yuan has weakened by 0.1% against the dollar.

"We believe that if Trump can do less on the domestic market, it is more likely to focus on external issues such as trading, which will impact the risk sentiment," said Patrick O'Donnell, Manager investments at Aberdeen Asset Management in London.

Elsewhere, the euro gained 0.6% to trade at 1.1491 US dollar against the dollar. The single currency has changed hands by more than 1% above the low of 1.1301 USD reached on August 15th.

Sterling was the other big winner with the British currency up 0.5%, supported by a BBC report that Britain was preparing for a Brexit deal by the end of this year. November.