US dollar dips ahead of elections

The U.S. dollar fell as American voters headed to the polls on Tuesday. The election results are likely to determine the near-term fate of the greenback. Polls show a tight race between Republican presidential candidate Donald Trump and Democratic candidate Kamala Harris. The party that wins the presidency may also gain control of Congress, which could lead to more extreme currency moves.

The dollar dipped even as betting markets showed rising odds of Trump winning the presidency. Trump’s policies on immigration and tariffs are expected to increase inflation, while his plans for tax cuts and deregulation may boost economic growth, leading to higher longer-term Treasury yields and a stronger dollar.

Conversely, a Democratic victory could send the dollar lower as traders unwind bets on Trump and become concerned about the economic impact of higher taxes and stricter business regulations. Regions like the euro, Mexican peso, and Chinese yuan have seen currency weakness due to the so-called “Trump trades,” with the potential for new tariffs under a Trump presidency.

Volatility in these currency pairs has surged as the election approaches. The one-week implied volatility for the euro-dollar exchange rate is the highest since March 2023. Implied volatility for China’s offshore yuan is at a record high, while that for the dollar-Mexican peso is at the highest level since March 2020.

The dollar index was last down 0.48% at 103.43, reaching 103.37, the lowest level since October 16. The euro gained 0.48% to $1.0929, reaching as high as $1.09368, the highest level since October 11. The greenback dipped 0.44% to 151.46 Japanese yen, sinking as low as 151.35, the lowest level since October 23.

Traders are also focused on the Federal Reserve’s two-day meeting, which is expected to conclude on Thursday with a 25 basis point rate cut. Investors will be looking for clues on whether the Fed could skip a cut in December. A stronger-than-expected jobs report for September has led investors to pare back expectations on how many times the Fed is likely to cut rates, but a weaker-than-anticipated report for October has raised some doubts about this view.