By Stefano Rebaudo
Nov 5 (Reuters) - The euro eased slightly on Thursday, after a three-day rally, as energy prices headed higher amid uncertainty about what will happen in the war in Iran before the new Democratic-controlled US Congress takes office in January.
Citi said concerns that the White House could escalate tensions with Iran persisted after the midterm elections on Tuesday.
Democrats swept to majorities in the Senate and House of Representatives, spurring gains in US Treasuries and global
equities, though doubts remained about whether the new Congress would be as accommodating to the AI sector.
The euro was down 0.05% at $1.1216, after reaching $1.1273 on Wednesday, its highest level since October 6.
The oil price was last up 2% after a three-day decline.
"On balance, we see political developments overnight as supportive of a continued bottoming out in the euro/dollar: lower energy and global policy risk premium but higher AI implementation risks should on balance weaken the dollar," said George Saravelos, global head of forex strategy at Deutsche Bank.
Analysts said that the euro could face renewed downward pressure as investors temper expectations for further ECB monetary tightening while concerns linger over France's fiscal trajectory and ability to curb budget deficits.
Flag-waving protesters marched through French cities and public workers went on strike on Thursday.
Rising public debt and the rapid expansion of non-bank finance could curb the ECB's ability to set the appropriate monetary policy, ECB board member Isabel Schnabel said on Thursday.
Roberto Mialich, global forex strategist at Unicredit, suggested "the euro/dollar needed to break above at least 1.1325 to convincingly ease selling pressure in the near term."
The dollar index, which measures the greenback against a basket of currencies, rose 0.13% to 101.62, after hitting 101.21 in the Asian session, the lowest since September 30.
Despite the political shift in the US, expectations for the Federal Reserve's interest rate path remained largely intact. Markets are pricing in an 80.7% chance of 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.
Sterling was little changed against both the euro and the dollar after the Bank of England raised interest rates, a move investors did not view as the start of an aggressive tightening cycle.
It strengthened 0.05% to $1.3478 and was up 0.10% to 83.28 pence against the euro.
The yen gained after minutes from the Bank of Japan's September meeting, when policymakers raised rates to a 31-year high of 1.25%, reinforced bets for further interest rate hikes.
The BOJ minutes showed some board members signalling a chance of faster-paced increases. Markets now widely expect the BOJ's next hike to come in December. The yen rose 0.14% to 158.18 per dollar.
The BOJ board also debated neutral rate and market pricing of the BOJ's terminal rate, in a sign of its growing focus on how far the central bank could lift borrowing costs without cooling the economy too much.
(Reporting by Stefano Rebaudo; Editing by Thomas Derpinghaus, Peter Graff and Susan Fenton)
