The currency came under additional pressure as US Treasury yields declined, with investors shifting towards government bonds amid uncertainty over the political implications of the election results. Traders also reduced expectations of interest rate increases next year.
The euro climbed 0.6 per cent to $1.1258, while the dollar index, which measures the greenback against six major currencies, dropped 0.6 per cent to 101.27, its lowest level in a month.
Meanwhile, the yield on the benchmark 10-year US Treasury note fell nearly five basis points to 4.915 per cent.
The dollar recorded particularly significant losses against the Japanese yen and Swiss franc, two currencies traditionally regarded as safe-haven assets. It declined 0.6 per cent against the Swiss franc to 0.8159, while the yen strengthened nearly 0.8 per cent to 157.92 per dollar.
The currency market reaction followed the Democrats’ major electoral breakthrough on Tuesday, when the party secured control of both chambers of Congress, recording victories in several traditionally Republican strongholds, including Kansas and Texas.
The results represented a significant setback for President Donald Trump, with Democrats flipping six Republican-held Senate seats and securing a majority, even as competitive contests in Michigan and Minnesota remained closely watched.
Beyond the political implications, investors are increasingly concerned about what Democratic control of Congress could mean for the future of the artificial intelligence industry, particularly the possibility of stricter regulations that could affect investment, innovation and broader economic growth.
Currency strategist at OCBC, Moh Siong Sim, said the dollar’s performance reflected concerns about increased regulatory pressure on the technology sector.
"The price action is consistent with concerns about greater scrutiny on AI in the event of a Democratic sweep, and that is reflected in the underperformance of the Nasdaq and worries about US growth should AI face greater regulation," Sim said.
However, he cautioned that translating the election outcome into significant legislative changes could prove difficult.
"Even in the event of a Democratic sweep, it is still difficult to pass legislation at the federal level, given the high hurdle under President Trump," he added, noting that the president retains veto powers.
Investors turn attention to economic fundamentals
With the midterm elections concluded, market participants are expected to refocus on economic indicators and monetary policy developments as key drivers of the dollar's direction.
Carol Kong, a currency strategist at Commonwealth Bank of Australia, said the strength of the US economy could continue to provide support for the currency, particularly if incoming economic data justifies further interest rate increases.
Kong maintained that strong economic figures would reinforce expectations of additional rate hikes, potentially helping the dollar recover some of its recent losses.
She also identified developments in the Middle East as another factor investors would be monitoring, particularly the possibility of renewed US military involvement following the elections.
"If he does ramp up the aggression in the conflict, then we could see oil prices jump sharply higher, and that will support the US dollar too," she said.
In the commodities market, oil prices edged lower to $102.90 per barrel after falling about one per cent on Tuesday, reaching their lowest level in nearly four weeks.
Elsewhere, the British pound gained 0.3 per cent to $1.3458 as investors awaited the Bank of England's monetary policy announcement scheduled for Thursday.
The central bank's Monetary Policy Committee is widely expected to increase interest rates for the first time since August 2023, a development that has kept traders focused on the outlook for the British currency.
In Asia, China's offshore yuan weakened 0.2 per cent to 6.6836 per dollar, extending losses recorded in the previous session.
The currency had suffered its biggest single-day decline since May 15 on Tuesday after the People's Bank of China increased the amount of foreign currency financial institutions are required to hold as reserves.
The move was aimed at slowing the yuan's rapid appreciation, adding another layer of uncertainty to currency trading as investors assessed the changing political and economic landscape.