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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 tmsnrt.rs/2RBWI5E

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 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 after touching a nearly three-year high of 78.195 on Wednesday.

The euro 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, 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 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 traded flat at $1.3615 as it continued to meander below the almost three-year high of $1.3703 touched on Monday.

Bitcoin 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. (Reporting by Ritvik Carvalho; additional reporting by Kevin Buckland and Stanley White in TOKYO, editing by Emelia Sithole-Matarise)

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