FOREX-Dollar hovers above 2018 lows after Democrats take control of Senate

* Control of both Houses gives Biden scope to push agenda
* Riskier currencies seen outperforming on growth prospects
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho
LONDON, Jan. 7 (Reuters) - The dollar edged higher on
Thursday, hovering above its lowest levels in nearly three years
on Thursday after Democrats won control of the U.S. Senate,
clearing the way for possible larger fiscal stimulus under
President-elect Joe Biden. Currency markets were largely unperturbed by scenes of chaos
in Washington after supporters of outgoing President Donald
Trump stormed the U.S. Capitol on Wednesday. Analysts generally assume a Democrat-controlled Senate would
be a net positive for economic growth globally and thus for most
risk assets, but negative for bonds and the dollar as the U.S.
budget and trade deficits may widen further. "The key narrative is that we should see higher inflation on
the back of stronger fiscal stimulus after the Democrats gain
control of the Senate," said Francesco Pesole, FX strategist at
ING in London.
"In the longer-term the implications for the dollar on
higher inflation should be negative."
Thursday's lift in the dollar was on the back of some
safe-haven buying, Pesole said, and reiterated ING's bearish
view for the dollar in 2021.
The dollar index =USD rose 0.2% to 89.567 in early London
trade, but not far off its overnight low of 89.206, a level not
seen since March 2018.
In a note to clients, BCA Research said that with the
Federal Reserve standing still, the boost to growth from
stimulus would likely lift inflation expectations, putting
downward pressure on real interest rates.
They added that stronger spending should cause the U.S.'
current account deficit to widen further.
"Scandinavian currencies, the Mexican peso and north Asian
EM FX stand to reap the greatest benefits from these trends,
even if at first, the dollar could stage a short-lived rebound."
The Australian dollar slipped 0.3% to 77.792 U.S. cents
AUD= after touching a nearly three-year high of 78.195 on
Wednesday.
The euro EUR=EBS was down 0.2% at $1.23030, after climbing
to $1.2349 on Wednesday for the first time since April 2018.
The dollar gained 0.3% to 103.385 yen JPY=EBS , after
dipping to 102.595 on Wednesday for the first time since March.
But after a fall of nearly 7% in 2020 for the dollar index
and a drop of as much as 0.9% in the new year, the U.S. currency
may get a degree of respite from some unwinding of a crowded
trade.
"People have been bearish on the dollar now for at least six
or nine months," said Minh Trang, senior FX trader at Silicon
Valley Bank in Santa Clara, California.
"Obviously you are going to have to take a little bit of a
breather every now and then."
The yuan was largely flat at 6.4596 per dollar CNY=CFXS
after Chinese authorities signalled a desire for a slower pace
of gains.
The remarks by the State Administration of Foreign Exchange
(SAFE) on Wednesday follow an advance of around 10% on the
greenback since last May as China's economic rebound has led the
world's pandemic recovery. The British pound GBP= traded flat at $1.3615 as it
continued to meander below the almost three-year high of $1.3703
touched on Monday.
Bitcoin BTC=BTSP marked a fresh all-time high of $37,800
on Thursday, extending a surge of more than 800% since
mid-March.
It last traded at $37,332.