Dollar falls after Democrats take US Congress in midterm elections

By Chuck Mikolajczak

NEW YORK, Nov 4 (Reuters) - The dollar dropped on Wednesday and was on pace for its biggest daily percentage decline in three weeks after a sweeping victory by Democrats in the US midterm elections, removing an uncertainty for the market as investors gauged potential regulatory changes.

Democrats seized control of both the Senate and House of Representatives on Tuesday, scoring sweeping victories in Republican strongholds for the first time in generations as tens of millions of voters delivered a scathing rebuke to President Donald Trump.

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The outsized win removed an uncertainty for markets grappling with the repercussions of the Iran war and an AI boom that has bolstered growth and inflation, just as the world's biggest economy's debt load mounts.

The elections removed any concerns about the potential for contested results while locking in a divided government with a Republican president and Democratic-controlled Congress.

US stocks rallied in the early stages of trading, while crude prices dropped as investors waited to see Washington's next move in the US-Israeli war with Iran in the wake of the election results.

"It's a risk-on feeling this morning. Maybe we're just seeing a bit of a combination of sell the news, buy the fact, relief that we're not going to be in a quagmire over rigged election results," said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.

"Fundamentally, you could still see more of the AI concerns, given the Democrat positioning on data centers and all. But for the time being, markets are relieved that Trump's not going to fight this, and when we see risk-on across the board, that's broadly dollar negative."

DOLLAR INDEX FALLS, EURO CLIMBS

The dollar index , which measures the greenback against a basket of currencies, fell 0.32% to 101.51, on track for its biggest drop since October 15, with the euro up 0.38% at $1.1236 after climbing to $1.272, its highest since October 6.

Despite the political change, expectations for the Federal Reserve's interest rate path remain largely intact. Markets are pricing in an 82.6% chance for a rate increase of at least 25 basis points from the Fed at its December meeting, according to CME FedWatch, up from 77.4% in the prior session.

PAYROLLS BEAT EXPECTATIONS

Markets showed little reaction to a flurry of US economic data.

The ADP National Employment Report showed US private payrolls rose by 86,000 jobs in October, above the 69,000 estimate of economists polled by Reuters. The report was the latest in a string of labor market data this week, which will wind up on Friday with the release of the government's payrolls report.

A separate report from the Institute for Supply Management said its non-manufacturing Purchasing Managers Index dipped to 54.5 last month, slightly below the 54.8 estimate but above the 50 threshold that signifies expansion, from 54.9 in September.

Sterling was up 0.43% at $1.346 after rising to a more than seven-week high of $1.3503 ahead of the Bank of England's policy announcement on Thursday.

The Bank of England is expected to bow to inflation pressure from soaring energy costs and raise interest rates, though it may push back against investors' bets that several more increases will follow next year.

Against the Japanese yen , the dollar weakened 0.03% to 158.6.