The dollar edged up on Tuesday but its gains were limited by investor caution about the U.S. midterm elections and any fallout for the world’s largest economy.
The greenback has outperformed most major currencies this year, benefiting from the robust U.S. economy and rising interest rates.
Investors are focussed on whether congressional elections – the results of which are expected from 2300 GMT -could disrupt the stellar run of the world’s most liquid currency.
The elections are expected to help the Democratic Party win control of the U.S. House of Representatives, with Republicans likely to retain their majority in the Senate.
Analysts believe a divided Congress will see the dollar dip because it is unlikely that any new fiscal stimulus could be launched to counterbalance forecasts of slowing U.S. economic growth next year.
That, in turn, would boost emerging market currencies hindered this year by higher U.S. rates, in particular those currencies running big external imbalances such as Turkey, Argentina, and South Africa.
But some analysts warn that an unexpected outcome could trigger an unwinding of long positions on the dollar which has rallied more than 7 percent from April lows against its rivals.
“Polls have been wrong before …. Should the Republicans surprisingly hold Congress, the dollar, equities and Treasury yields would get a lift on the promise of Trump 2.0,” said ING FX strategist, Petr Krpata.
The uncertainty kept investors from making big moves on Tuesday.
“Markets are in a holding pattern,” said Credit Agricole head of G10 FX Strategy Valentin Marinov.
“Yes, some traders might take profits on extended dollar long positions but we’re not expecting a big or immediate impact whichever way the election goes,” he added.
The dollar index .DXY, a gauge of its value versus six major peers traded up 0.2 percent at 96.446. It had hit a 16-month high of 97.20 last week.
The euro EUR=EBS was slightly lower at $1.1392, about one percent above this year’s trough of $1.1301 touched on Aug. 15.
Euro zone finance ministers called on Italy overnight to change its 2019 budget to conform with European Union rules before a deadline set for next week, but Rome dug in its heels saying its disputed deficit plan would not change.
Sterling sank after a senior member of the Northern Irish DUP party said on Tuesday it looked like Britain would leave the European Union without a divorce deal.
The pound erased earlier gains after the comments and fell to a five-month low versus the euro of 87.19 pence, down 0.2 percent on the day.
The latest comments indicate that Prime Minister Theresa May may struggle to get a deal through Parliament.
With less than five months before Britain leaves the EU, investors are growing anxious and sterling is moving sharply on any news of a possible breakthrough.
There was muted reaction in the Australian dollar AUD=D3 to the Reserve Bank of Australia’s widely anticipated decision to keep interest rates steady on Tuesday.
The Aussie later rose 0.3 percent to $0.7240. It is trading around 2.7 percent above a more than 2-1/2-year low of $0.7018 touched on Oct. 26.
