AI Brief
- The US dollar fell to a one-month low after Democrats secured majorities in both the Senate and House, raising concerns over tighter AI regulation and economic growth.
- The euro and British pound reached multi-week highs against the dollar, while safe-haven currencies like the yen and Swiss franc also strengthened.
- Investors are monitoring potential policy shifts, Middle East tensions, and upcoming Bank of England decisions amid ongoing market volatility.
A sweeping victory by Democrats in the US midterm elections sent the dollar tumbling on Wednesday, as investors weighed the prospect of tighter AI regulation and its potential drag on economic growth.
Several major currencies gained versus the dollar, with the euro and sterling trading at their highest levels in nearly two weeks and seven weeks, respectively.
Democrats captured majorities in both the Senate and the House, even prevailing in states that have long been conservative bastions, stoking fears that opposition to data centres may gather fresh momentum.
That also raised concerns about the potential hit to the US economy, given how much US growth has been tied to AI-related spending.
A slowdown in growth could dampen the dollar's appeal and reduce the need for interest rate hikes, which typically support a currency.
The dollar index =USD, which measures the US currency against a basket of six peers, fell to a one-month low and was last trading at 101.41.
Still, "investors increasingly appear to be viewing the election outcome as a constraint on future policy rather than a fundamental challenge to the broader US growth story," said George Vessey, lead FX and macro strategist at Convera.
"The so-called 'Blue Wave' has checked the dollar's advance. Whether the move develops into a more sustained period of dollar weakness will likely depend less on politics and more on whether softer yields, a cooling AI trade and incoming economic data begin to challenge the narrative of continued US exceptionalism."
The euro EUR=EBS gained 0.4% to US$1.1236, while the British pound GBP=D3 rose 0.46% to US$1.3475.
The yen JPY=EBS and the Swiss franc CHF=EBS, both safe-haven currencies, were also stronger. Against the Swiss franc CHF=EBS, the dollar weakened 0.54% to 0.8162. It fell 0.38% against the yen, to 158.09 per dollar.
The 10-year Treasury yield US10YT=RR dropped nearly 3 basis points to 4.921%.
"The price action is consistent with concerns about greater scrutiny of AI, and that is reflected in the underperformance of the Nasdaq and worries about US growth should AI face greater regulation," said Moh Siong Sim, currency strategist at OCBC.
But Sim also noted that "even in the event of a Democratic sweep, it is still difficult to pass legislation at the federal level, given the high hurdle under President Trump," who holds veto power.
FOCUS TO SHIFT BACK TO FUNDAMENTALS
Carol Kong, currency strategist at Commonwealth Bank of Australia, said she is watching the risk of an escalation in the Middle East, as US President Donald Trump has declined to rule out a resumption of combat operations.
"If he does ramp up the aggression in the conflict, then we could see oil prices jump sharply higher, and that will support the US dollar too," she said.
Oil prices LCOc1 inched higher to US$103.75 a barrel after easing about 1% on Tuesday.
Traders are also eyeing the Bank of England's policy announcement on Thursday. The central bank's Monetary Policy Committee is expected to raise interest rates for the first time since August 2023.
China's offshore yuan CNH=D3 fell 0.1% and was last trading at 6.6755 per dollar. It extended declines after suffering its biggest one-day drop since May 15 on Tuesday, when the People's Bank of China raised the amount of foreign currency that financial institutions must hold in reserve in a move to slow the yuan's rally.
Bitcoin BTC= crept higher to US$78,315.53. The cryptocurrency has been under pressure in recent days after a record US$6.3 billion heist at Binance.
