Dollar dips after midterm election splits power in U.S. Congress

© Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration

By Kate Duguid

NEW YORK (Reuters) - The U.S. dollar edged lower on Wednesday, with some investors tiptoeing back into riskier assets after midterm elections split power in the U.S. Congress, giving Democrats greater ability to check any major initiatives from President Donald Trump.

Traders pulled out of the safe-haven currency after the election results came in as expected. Some had worried that political instability might ensue if either party had won full control.

"There was this expectation that if we didn’t get a divided Congress, we might see risk sentiment becoming a little shaky, but since that didn’t happen we have a risk-on move," said Mazen Issa, senior foreign exchange strategist at TD Securities in New York.

The greenback has been the surprise winner in the global currency markets this year after Trump and congressional Republicans passed a significant tax cut, and strong economic growth prompted the U.S. Federal Reserve to start steadily raising interest rates.

Market watchers believe the outcome of the U.S. midterm, with Democrats taking the House of Representatives and Republicans keeping control of the Senate, would make further tax cuts and deregulation unlikely for now.

"For the dollar, there are fewer fiscal initiatives like tax reform to drive sentiment higher. Any sort of fiscal stimulus is less likely to be observed over the next two years," said Issa.

Prospects of less fiscal stimulus would also relieve the pressure on the Fed to keep raising interest rates and add downward pressure on U.S. Treasury yields and the dollar.

Some analysts had said a fully Republican Congress could have meant increased trade tension and a larger deficit.

Against a basket of other currencies (DXY), the dollar slipped 0.16 percent on the day, last at 95.838, its lowest level in two weeks. The yield on the benchmark 10-year Treasury note was down 2.5 basis points, last at 3.189 percent.

Equity markets rallied as investors pushed funds into riskier assets, and on hopes that the reduced likelihood of more fiscal stimulus would bring the end to a multi-year U.S. rate hike cycle.

The euro (EUR=) gained half a percent to trade at $1.148. The single currency changed hands more than 1 percent above this year's trough of $1.1301 reached on Aug. 15.

Sterling rose 0.38 percent, last at $1.316 buoyed by a BBC report that Britain is preparing for a Brexit agreement by the end of November.