The dollar started Tuesday on the defensive as traders took positions on the day of the US presidential election, after recent polls reduced some of the market's bets on a victory for Republican Donald Trump.
Democrat Kamala Harris has also seen her odds improve on election betting sites and has a slight lead on PredictIt, although Polymarket continues to show Trump as the favorite.
The US currency fell 0.76% against the euro overnight, hitting a three-week low, after an opinion poll over the weekend showed that Ms. Harris had a surprising lead in Iowa, a traditional Republican stronghold. Overall, however, polls continue to show the race is close.
Meanwhile, the Australian dollar hovered close to a near three-month low, with the Reserve Bank of Australia widely expected to maintain policy later in the day. Traders will, however, focus on cues regarding the timing of an interest rate cut.
In recent weeks, financial markets have tilted heavily in favor of a victory for Trump – whose policies on tariffs and immigration are considered inflationary by analysts – which has driven up ratings on some platforms of Paris.
The dollar index, which measures the currency against six other currencies including the euro, was stable at 103.92 at 0033 GMT, after falling as low as 103.67 on Monday for the first time since October 21. Last week it reached its highest level since the end of July at 104.63.
The euro was little changed at $1.0873, after rising to $1.09145 in the previous session for the first time since October 15.
Against the yen, the dollar traded at 152.325, after sliding to 151.54 overnight, a one-week low.
“We believe financial markets are now positioned for a Harris victory,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia.
“The dollar can therefore fall modestly by 1% to 2% this week if Vice President Harris wins and rise materially if (former) President Trump wins,” she added. “Any delays and/or disputes regarding vote counting may also add to currency volatility this week.”
The winner may not be known for several days after Tuesday's vote, although Trump has already signaled he will try to fight back any defeat, as he did in 2020.
One-week implied volatility of euro/dollar options reached its highest level since March 2023.
The same options for the offshore yuan against the greenback came close to Monday's record, while those on the dollar-Mexican peso pair reached their highest level since April 2020. Analysts and traders believe that China and Mexico would be among the countries hardest hit by Mr. Trump's protectionist policies.
Top cryptocurrency bitcoin gained 1.4% to $67,992, after hitting a one-week low of $66,776.19 overnight.
Analysts believe that Mr. Trump will adopt more cryptocurrency-friendly policies than Mr. Harris.
“While you can guess who will win, we are confident in the scenarios we have presented recently: In short, a Trump victory or a red wave is bullish for the dollar; a blue wave will crush the dollar,” the analysts said from TD Securities in a note. “Somewhere in the middle is a Harris victory”.
“We don't think Harris is necessarily bad for the dollar in the medium term,” they added. “Harris simply shifts the focus back to macroeconomics, while Trump reshapes the market narrative around politics.”
On Thursday, the Federal Reserve is expected to cut rates by 25 basis points. Markets will focus on any hint that the US central bank may not make a cut in December, after last week's monthly jobs report showed that employers created far fewer jobs than Economists had not predicted it in October, raising questions about how weak the jobs market was.
Also on Thursday, the Bank of England is expected to cut rates by 25 basis points, while the Riksbank is expected to ease rates by 50 basis points and Norges Bank is expected to maintain its status quo.
In Australia, investors will be sensitive to any changes to the RBA statement – due at 0330 GMT – particularly that policy must be “sufficiently restrictive”, and not “rule anything out” on rates .
The Australian dollar fell slightly to $0.6582, remaining near last week's low of $0.6537, the weakest since August 8.
