Dollar squeezed as traders wait on Georgia results

The US dollar steadied in Asia on Wednesday as traders looked to the outcome of a Senate election in Georgia to drive the next move in market sentiment.

The dollar had dropped through a major support level against the Japanese yen on Tuesday and it briefly fell to afresh 10-month low of 102.60 yen on Wednesday before steadying. The euro also rose past major resistance at $1.2310 to as high as $1.2328 in early Asia trade, its strongest since April 2018, before slipping back to $1.2281 as traders watched close early results from Georgia flow in.

The Australian and New Zealand dollars hung on to hefty gains to trade near multi-year highs, with the Aussie a touch softer at $0.7745 and the kiwi touching a new 32-month top before easing back to $0.7240. Sterling was slightly softer at $1.3607. The outcome of the runoff vote to elect two senators in Georgia will determine control of the US Senate, although a final result is not expected before Wednesday morning in the US, perhaps longer if it is close. If they win both spots, Democrats will take control of the Senate and would be able to pass their legislative agenda, which could include higher taxes and more stimulus.

"The market reaction to the outcome will probably be dictated by what it is assumed to mean for fiscal policy,rightly or wrongly," said RBC Capital Markets currency strategist Adam Cole. "If the Democrats do manage to take both seats the assumption will be that (President-elect Joe) Biden has more freedom to set policy and that likely means more fiscal easing,"he said, which would lift risk sentiment and weigh on the dollar.

Vasu Menon, investment strategy executive director at OCBC Bank in Singapore said that while potential tax hikes are "not particularly market-friendly", the extra spending would be broadly bullish for commodities and emerging markets. The dollar has fallen 13% against a basket of currencies since it hit a three-year peak last March. The dollar index was steady at 89.491 on Wednesday, just above a 2-1/2 year low hit on Monday. Bets against the dollar have become crowded as investors wager that low U.S. interest rates and a big trade deficit can keep it heading lower for some time yet.

Asian currencies have received an added boost from China's rising yuan, which increases China's purchasing power for commodities and other imports. The yuan surged to its highest since June 2018 on Tuesday after the People's Bank of China lifted the midpoint of its trading band by 1%, the biggest one-day lift since China abandoned a peg to the dollar in 2005.

Traders took that as cue to keep buying, before profit-taking and some selling by major state-owned Chinese banks cooled the rally. In offshore trade, the yuan steadied at 6.4293on Wednesday. It has gained 12% on the dollar since last May as China's economic rebound has led the world's pandemic recovery. Elsewhere, a rise in oil prices lifted exporters' currencies, sending the Norwegian crown to a 21-month high of 8.4350 per dollar and the Canadian dollar to a 32-month peak.