London

THE dollar hit its lowest level in nearly three years on Wednesday, with markets pricing in a Democrat win in the US Senate election in Georgia that would pave the way for a larger fiscal stimulus package and fuel currency market risk appetite.

Democrats won one hotly contested US Senate race in Georgia and pulled ahead in the second by 1200 GMT, edging closer to control of the chamber.

Analysts generally assume a Democrat-controlled Senate would be positive for economic growth globally and thus for most riskier assets, but negative for bonds and the dollar as the US budget and trade deficits swell even further.

As markets priced in the Democrats winning both seats, the dollar index hit its lowest since March 2018, extending its overnight losses during the European session. At 1153 GMT, it was at 89.292, down 0.2 per cent on the day.

The dollar also fell to its lowest in six years versus the Swiss franc at 0.87585.

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Saxo Bank's head of FX strategy, John Hardy said that although the increased likelihood of US fiscal stimulus is in line with expectations for dollar weakness, if the recent rise in US Treasury yields continues, then that could curtail the dollar's ability to fall in the longer term.

The euro was up 0.3 per cent at US$1.2335, having risen past major resistance to hit as high as US$1.2346 in early European trading .

"We had not assumed Democrat victories in these elections and hence some revisions weaker to the extent of US dollar weakness we expect this year may be warranted," Derek Halpenny, head of research at MUFG, wrote in a note to clients.

"We currently tentatively are targeting 1.2800 for euro/US$ by year-end," he added.

But Elsa Lignos, global head of FX strategy at RBC Capital Markets said that she disagreed with the market consensus that US fiscal stimulus is "risk-on" and therefore dollar-negative. Instead, she said, big infrastructure spending in the US would strengthen the dollar, particular against non-commodity producing developed market currencies.

Riskier currencies also surged, with the New Zealand dollar and Australian dollar hitting their highest since 2018 and holding onto these gains in the European session .

The move was helped by a range of surveys overnight showing that manufacturing globally had proved resilient in December, despite escalating virus cases.

After surging on Monday and Tuesday, the yuan softened, after China's central bank appeared to signal a preference for a more moderate pace of intervention.

The yuan has gained around 10 per cent on the dollar since last May as China's economic rebound has led the world's pandemic recovery. REUTERS