Dollar flat as Wall Street rout lifts safe-haven yen; pound in focus as BOE hikes

The U.S. dollar was essentially flat on Thursday, with the spotlight dominated by a bruising sell-off on Wall Street. Concerns around more stringent regulation of the artificial intelligence industry after a decisive Democratic victory in the U.S. midterm elections led to traders dumping technology stocks and flocking to safe-haven assets such as Treasury bonds and the Japanese yen.

Currency market participants also digested some solid U.S. labor market data and a widely expected 25 basis point rate hike by the Bank of England.

At 16:00 ET (21:00 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was little changed at 101.58.

Realities of a Democratic sweep, labor market data

A day after a sweeping Democratic victory in the U.S. midterm elections removed a significant degree of uncertainty from markets, more attention was paid to the possible political ramifications of the sweep. With the Democrats now in control of both chambers of Congress, concerns grew that the party could pursue greater regulation of the AI system and attempt to slow down the proliferation of massive data centers. 

Given that the massive AI infrastructure buildout has played a key role in boosting the U.S. economy, any hit to it could affect growth and take the shine off the dollar.

"We thought we were out of the woods yesterday as markets rallied post-midterms, but all of a sudden, it’s a total bloodbath here on Wall Street," José Torres, senior economist at Interactive Brokers, said.

"Investors are running for the hills and quickly dumping tech stocks, especially semis, as participants exhibit a change in character regarding how a Democratic majority in both chambers of Congress could derail the AI buildout through greater oversight and tighter regulations," he added.

While the tech rout grabbed all the attention, watchers of monetary policy also kept an eye on the U.S. economic calendar.

According to the U.S. Department of Labor, the number of Americans filing for initial jobless claims in the week ending October 31 fell 6k to 189k. Separately, Challenger, Gray & Christmas said U.S. layoffs in October were 43,994, the lowest level for that month since 2023.

The data comes after a better-than-expected October reading on U.S. private employment and a report that showed U.S. job openings hitting a four-month high.

All eyes are now on Friday’s nonfarm payrolls, which will likely factor into the Federal Reserve’s plans for interest rates. The central bank is expected to hike rates in December to help quell inflationary pressures, and further signs of labor market resilience could give the central bank more headroom to lift borrowing costs. Higher rate environments tend to strengthen the dollar. 

Bank of England decision ’unexpectedly unanimous’

Across the Atlantic, the euro and the sterling slipped, with the former down 0.1% to $1.1217 and the latter shedding 0.2% to $1.3448. The moves were largely related to the rout on Wall Street, but the sterling was also in focus after the Bank of England (BOE) hiked interest rates for the first time in more than three years. 

The BOE’s Monetary Policy Committee (MPC) raised the key policy rate by 25 basis points in a 8-1 vote, with the lone dissenter calling for an even bigger half-point hike. Policymakers argued that inflationary pressures had grown enough to warrant an increase in borrowing costs.

"The Bank’s hike in Bank Rate was unexpectedly unanimous. All nine members of the MPC pushed for a rise in Bank Rate," Sanjay Raja, chief UK economist at Deutsche Bank, noted.

"We don’t think this is the start of a long hiking cycle – as noted by Governor (Andrew) Bailey in his opening remarks. Today’s hike merely adds a dose of policy restriction to an already restrictive policy stance. Moreover, with financial conditions having tightened materially since March, the case to go much further isn’t as strong as it may have been in the Bank’s previous hiking cycle back in 2022," he added.

Hawkish BOJ minutes

Over in Asia, the Japanese yen strengthened to 157.83 per dollar, as the currency caught a massive safe-haven bid. The yen was also supported by the minutes of the Bank of Japan’s (BOJ) September meeting, which revealed a distinctly hawkish tone.

With Japan’s policy rate already sitting at a 31-year high of 1.25%, the minutes showed that several board members saw clear room to accelerate the pace of rate hikes, narrowing the wide transatlantic yield gap that had long weighed on the currency.

Roushni Nair and Pranav Kashyap contributed to this article