Dollar slumps to two-month low, investors see more declines

By David Henry

NEW YORK (Reuters) - The dollar sank to its lowest level in over two months against a basket of peer currencies on Friday, as vote counting for the contentious U.S. elections slowly moved toward a divided government and investors predicted more losses for the currency.

Investors are betting that Democrat Joe Biden will become the next president but Republicans will retain control of the Senate, which will make it difficult for the Democrats to pass the larger coronavirus relief package they have been pushing.

The need for more stimulus was underlined on Friday when the U.S. government reported that employers hired the fewest workers in five months in October. It was the clearest evidence yet that the end of the previous fiscal stimulus and exploding new coronavirus infections were sapping momentum from the economic recovery.

The surge of new coronavirus cases to record levels in several U.S. states could also curb economic activity.

"We're still left with the view that the U.S. economy is decelerating, and that's playing out in a markedly weaker dollar," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

Biden stood on the verge of winning the U.S. presidency on Friday, as he expanded his narrow leads over President Donald Trump in the battleground states of Pennsylvania and Georgia. Winning Pennsylvania's 20 electoral votes would put the former vice president over the 270 he needs to secure the presidency.

The dollar index <=USD> fell against a basket of six major currencies to 92.235, hitting its lowest level since Sept. 2.

For the week, the dollar index was down as much as 1.9%, on course for its biggest drop since March.

A large decline in long-term Treasury yields due to expectations for less fiscal stimulus, combined with a rally in equities and other riskier assets, has placed the dollar under consistent selling pressure that is likely to continue.

"So far investors have been prepared to overlook the threat of a contested election, presumably seeing Donald Trump’s legal initiatives as 'frivolous' and these benign conditions have generated a broad-based dollar decline," said strategists at ING.

The dollar fell further against the Japanese yen, trading at 103.255 yen <JPY=D3> on Friday, close to an eight-month low.

Japanese Prime Minister Yoshihide Suga has vowed to work closely with overseas authorities to keep currency moves stable, because a strong yen is widely viewed as a threat to Japan's economy.

To be sure, the dollar could strengthen if the U.S. vote counting continues to stretch out.

"The longer the vote counting goes, the more nervous the market could get and that could actually result in safe-haven flows for the greenback," Western Union Business Solutions' Manimbo said.

But for now, he said, "it looks like there's the potential for dollar sentiment to continue to erode in the weeks ahead."

The onshore yuan <CNH=D3> gained to 6.5868 per dollar, the strongest in more than two years.

Many investors expect a Biden administration would slightly scale back Trump's trade war with China, which should benefit the yuan.

Against a buoyant euro <EUR=EBS>, the dollar traded at $1.1882 after falling 0.87% in the previous session.

The single currency has risen sharply this week on the dollar's weakness, but has also benefited from news of the European Union inching closer to a budget deal.

(Reporting by David Henry and Karen Brettell in New York and Ritvik Carvalho in London; editing by Jonathan Oatis and Chizu Nomiyama)