Dollar Trims Gains as U.S. Election Race Tightens

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With riskier currencies staying on the backfoot, the U.S. dollar trimmed some of its gains, as the markets were waiting for the outcome of the U.S. elections after early results indicated that the race was tighter than anticipated. This came as a surprise for investors, as they were betting on a decisive win for Democrat challenger Joe Biden. Market hopes for a clear outcome were dashed when Republican Donald Trump scored a victory in key battleground states of Texas, Ohio, and Florida. Now, investors are waiting to see if he would be able to win the Rust Belt states that had helped him reach the White House four years ago. These include Pennsylvania, Michigan, and Wisconsin.

There was a 1.2% surge in the dollar overnight, as it reached more than one-month highs, as compared to its rivals. In contrast, riskier currencies, such as the Australian dollar and the yuan both declined by nearly 1% each. However, as the race between the two candidates tightened, the dollar trimmed some of its gains, so it was trading at a 0.7% high. Market analysts said that the ‘blue sweep’ that was expected by the market has not materialized in the U.S. elections. 

A victory for Joe Biden in the U.S. presidential elections was expected to increase prospects for a bigger U.S. fiscal aid package and reduced tensions of trade war, which had led to a sharp fall in the dollar. On Tuesday, the expectations of a Joe Biden victory had caused the dollar to reach a one-week low. However, the risk of a contested election is now high because of an uncertain outcome. This would result in lengthy legal battles and would push investors to give some attention to safer assets. Analysts said that markets had now entered the wait-and-see mode due to the uncertainty of results. 

They said that they had expected bigger moves in any direction, but that doesn’t seem to be happening. The increasing chances of a re-election for President Donald Trump would hurt currencies that have suffered due to his trade policies, such as the yuan and the Mexican peso, which were down by 0.7% and 2.2% for the day. The Australian dollar also slumped for the day by 1.2%, whereas the Sterling declined by almost 1%. The euro had also declined by 0.4% to trade at $1.1671, after reaching its lowest in the last three months in early trading. 

The analysts said that the U.S. dollar had come under pressure when going into the election and now it was simply unwinding. However, there was a decline in the volatility gauges for the dollar-yen and euro-dollar overnight. Earlier this week, they had reached their highest level since March. But, market participants were of the opinion that this was mostly because of a lack of information at this stage. Investors were just not willing to initiate any new trades because there is a great deal of uncertainty surrounding the election for now and there is no way to determine the outcome.