By Rocky Swift
TOKYO, Nov 5 (Reuters) - The dollar extended its decline on Thursday in the aftermath of an overwhelming victory by Democrats in US midterm elections, which sent oil prices sharply lower and buoyed risk sentiment.
The yen gained after minutes from the Bank of Japan's September meeting reinforced bets for further interest rate hikes, while sterling rose toward a seven-week high ahead of a Bank of England policy decision when another rate increase was expected.
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 market reaction, particularly the sharp drop in oil prices, reflected expectations that President Donald Trump will now be unable to conduct an aggressive agenda including the US-Israeli war on Iran or trade tariffs, said Rodrigo Catril, senior currency strategist at National Australia Bank.
"We need to be mindful that currency and market movements in general may not necessarily reflect a sort of medium-term dynamic, but rather positioning and maybe even overreaction to the results of the midterms," Catril said. "What seems to be a bit clearer is that the move lower in oil prices is very helpful for risk sentiment, as well as the move lower in yields."
The dollar index, which measures the greenback against a basket of currencies, fell 0.25% to 101.22, extending a 0.34% slide on Wednesday. The euro climbed 0.32% to $1.1263, while the yen strengthened 0.35% to 157.84 per dollar.
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.
Key data inputs for Fed policymakers will be labour market indicators, including initial jobless claims on Thursday and non-farm payrolls on Friday. They come on the heels of the ADP report on Wednesday showing that private payrolls rose by more than expected in October.
"The tight growth in supply of the labour market I think means that the unemployment rate is going to remain low, and therefore consumption growth should remain healthy in the United States," Brian Martin, head of G3 Economics at ANZ, said on a podcast. "The midterm elections themselves aren't likely to meaningfully change that path of tightening that we had expected."
Sterling strengthened 0.14% to $1.349, poised for its highest close since September 14, ahead of the Bank of England's policy announcement on Thursday. The central bank is expected to raise rates to contend with inflation pressure from soaring energy costs, although it may push back against investor bets that several more increases will follow next year.
The Bank of Japan meeting minutes from September, when policymakers raised rates to a 31-year high of 1.25%, underscored expectations for further tightening, with some board members signalling a chance of faster-paced increases. Markets now widely expect the BOJ's next hike to come in December.
The Australian dollar strengthened 0.11% versus the greenback to $0.7011, while New Zealand's kiwi dollar surged 0.5% to $0.5648.
In cryptocurrencies, bitcoin gained 0.28% to $80,400.79 and ether rose 0.18% to $2,421.52.
(Reporting by Rocky Swift; Editing by Shri Navaratnam and Thomas Derpinghaus)
