By Chuck Mikolajczak
NEW YORK, Nov 4 (Reuters) - The dollar retreated on Wednesday but was off its earlier lows after a sweeping victory by Democrats in the US midterm elections removed a source of uncertainty for the market while investors gauged the potential for regulatory changes.
Democrats seized control of both the Senate and House of Representatives on Tuesday, scoring sweeping victories in some Republican strongholds for the first time in generations as tens of millions of voters delivered
a sharp rebuke to President Donald Trump.
The outsized win eased concerns about potentially contested results, although it brought the prospect of divided government and legislative gridlock between a Republican White House and a Democratic Congress, as the US grapples with the Iran war and an AI boom that has fuelled both economic growth and inflation.
US stocks rallied, with the S&P 500 up about 2%, while crude prices plummeted as investors waited for Washington's next move in the US-Israeli war with Iran.
"It's a risk-on feeling. Maybe we're just seeing a bit of a combination of sell the news, buy the fact, relief that we're not going to be in a quagmire over rigged election results," said Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull in Toronto.
"Fundamentally, you could still see more of the AI concerns, given the Democrat positioning on data centers and all. But for the time being, markets are relieved that Trump's not going to fight this, and when we see risk-on across the board, that's broadly dollar negative."
DOLLAR INDEX FALLS, EURO CLIMBS
The dollar index, which measures the greenback against a basket of currencies, fell 0.25% to 101.60 after earlier falling to 101.21, its lowest since September 30. The euro was up 0.21% at $1.1217 after climbing to $1.1272, its highest since October 6.
Despite the political shift in the US, expectations for the Federal Reserve's interest rate path remained largely intact. Markets are pricing in an 81.2% chance for 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.
PAYROLLS BEAT EXPECTATIONS
The election results largely overshadowed a flurry of US economic data.
The ADP National Employment Report showed US private payrolls rose by 86,000 jobs in October, above the 69,000 estimate of economists polled by Reuters. The report was the latest in a string of labor market data this week, which will wind up on Friday with the release of the government's payrolls report.
A separate report from the Institute for Supply Management said its non-manufacturing Purchasing Managers Index dipped to 54.5 last month, down from 54.9 in September. The latest reading was slightly below economists' 54.8 estimate but above the 50 threshold that signifies expansion.
Sterling was up 0.38% at $1.3462, after rising to a more than seven-week high of $1.3503 ahead of the Bank of England's policy announcement on Thursday. The pound was poised for its sixth straight daily gain, its longest run higher since an eight-session streak that ended on July 6.
The Bank of England is expected to bow to inflation pressure from soaring energy costs and raise interest rates, although it may push back against investors' bets that several more increases will follow next year.
Against the Japanese yen, the dollar weakened 0.14% to 158.43.
(Reporting by Chuck Mikolajczak; additional reporting by Li Gu in Shanghai, Ankur Banerjee in Singapore and Niket Nishant in Bengaluru; Editing by William Maclean, Kirsten Donovan and Edmund Klamann)
