FOREX-Dollar retreats as Democratic wins in US midterms stoke AI regulation jitters

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, 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 gained 0.4% ⁠to $1.1236, while the British pound rose 0.46% to $1.3475. The yen and the Swiss franc, both safe-haven currencies, were also stronger. Against the Swiss franc, 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 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 inched higher to $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 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 crept higher to $78,315.53. The cryptocurrency has been under pressure in recent ‌days after a record $6.3 billion heist ‌at Binance.