By Saqib Iqbal Ahmed
NEW YORK (Reuters) - The dollar advanced against most major currencies on Wednesday, as results so far for the U.S. midterm elections showed little evidence of a "red wave" resounding Republican victory that some expected, leaving investors to focus on upcoming inflation data.
Republicans made modest gains in the midterms but Democrats performed better than expected, as control of the Senate hinged on three races that remained too close to call.
A stronger showing by Republicans may have backed the idea of less fiscal support and potentially a lower peak in the Fed's terminal rate, which would have been dollar negative, said Joe Manimbo, senior market analyst at Convera in Washington.
"Markets are now in the process of turning the page on politics and bracing for the inflation report tomorrow," Manimbo said.
Investors are waiting to see whether Thursday's U.S. Consumer Price Index data will spur the Federal Reserve to continue to increase interest rates well into next year in a bid to curtail inflation, or whether they might be able to ease policy tightening.
The dollar has retreated from multi-decade highs in recent weeks as investors take profits following a months-long rally and as speculation grows that the Fed may be inching closer to pulling the curtain on its dollar-supporting interest rate hikes.
"The inflation report could be a good litmus test to gauge whether dollar sentiment has materially softened," Manimbo said.
The euro was 0.7% lower against the dollar at $1, while the greenback was up 0.7% against the yen.
Still the outlook for the dollar was less than rosy.
"Despite today's pop higher in the USD, broader trends remain soft and we still feel the USD bull cycle is maturing and that the currency is prone to more weakness ahead," Shaun Osborne, chief currency strategist at Scotiabank, said in a note.
Sterling fell 1.73% against the dollar to $1.1337, on pace to snap a three-day winning streak as investors fretted over the currency's inability to breach the $1.16 level the day before. Investors remain on edge ahead to British finance minister Jeremy Hunt's planned fiscal statement on Nov. 17, with indications there will be a squeeze on public spending and potentially higher taxes.
On Wednesday, the dollar was also supported by a bout of risk aversion ahead of Thursday's inflation report and a second day of weakness in cryptocurrencies as investors continued to fret about the stability of the sector and the financial health of major exchange FTX despite plans for a rescue deal from bigger rival Binnacle.
FTX's native token was down 43% at a more than two-year low of $3.112, while bitcoin was 10.13% lower at $16,809.83, just off the two-year low of 16,452.98 touched earlier in the session.
(Reporting by Saqib Iqbal Ahmed; Editing by Alex Richardson)