Dollar flat, investors cautious ahead of U.S. election results

NEW YORK (Reuters) - The dollar was essentially unchanged on Tuesday as Americans headed to the polls, its moves limited by investor caution about the U.S. midterm elections and any fallout for the world’s largest economy.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo/File Photo

The greenback has outperformed most major currencies this year, benefiting from the robust U.S. economy and rising interest rates. Investors are focused on whether congressional elections could disrupt the stellar run of the world’s most liquid currency.

The Democratic Party is expected to win control of the U.S. House of Representatives, with Republicans likely to retain their majority in the Senate. A split Congress may hurt the dollar temporarily: a Democratic win in one or both chambers is likely to be seen as a repudiation of President Donald Trump and the policies which have boosted corporate growth.

That, in turn, would boost emerging market currencies hindered this year by higher U.S. rates, in particular currencies of countries running big external imbalances such as Turkey, Argentina and South Africa.

The dollar index .DXY was down 3.6 basis points on the day to 96.296 against a basket of six rivals, which could suggest the market has a slight bias for a Democratic House victory.

But although a divided Congress may lead to a short-term downturn in the dollar, “because this outcome has the highest probability, this will limit the market impact and lead to a quick reversal of the initial reaction,” said Alan Ruskin, global head of currency strategy at Deutsche Bank.

Ultimately, analysts argue it may be the case that a split Congress would be a boon for the greenback in the long term. A fully Republican Congress could mean increased trade tension and a larger deficit. If Democrats take both houses, they may roll back tax cuts and reinstate regulations that were eased by the Republicans and which have helped corporate performance.

“If the House changes hands, as long as the gridlock doesn’t create more issues for the economy, there’s nothing to impede the Fed from raising rates which would boost the dollar,” said Minh Trang, senior foreign exchange trader at Silicon Valley Bank.

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.

The euro EUR= was slightly higher at $1.141, about 1 percent above this year's trough of $1.130 touched on Aug. 15.

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. But it had retraced its losses in afternoon trade, last at $1.309 GBP=.

Reporting by Kate Duguid and Tom Finn; Editing by Chizu Nomiyama and Andrea Ricci