Greenback retreats ahead of US election results

London

FOREIGN exchange markets in Europe tilted on Tuesday towards pricing a victory for US Democratic candidate Joe Biden against President Donald Trump despite warnings that possible post-election disputes could unleash weeks of US dollar volatility.

The greenback was down 0.4 per cent against a basket of currencies at 93.656 after hitting a month-high on Monday. Analysts believe a Biden win would weaken the US dollar as the former vice-president is expected to spend big on stimulus and to take a freer approach to trade, boosting other currencies at the greenback's expense. They cautioned, however, that uncertainty was very high about the election outcome, and that taking positions might prove premature.

The euro extended gains and rose 0.49 per cent against the US dollar to US$1.1645. Sterling also went up 0.56 per cent to just below US$1.30.

Meanwhile, European stock markets were also making strong gains while eurozone government yields rose - another sign investors were switching from a cautious mood and getting ready to bet on a clear victory for the Democratic candidate.

"I'm more nervous than European markets are today," said Berenberg chief economist Holger Schmieding, warning some investors may be jumping the gun on the issue, particularly if no clear winner emerged swiftly from the polls.

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Mr Trump, who is trailing Mr Biden in national opinion polls, has criticised mail-in ballots and suggested he would deploy lawyers if states are still counting votes after Election Day on Tuesday.

Overnight gauges of volatility for major currency pairs jumped to multi-month highs ahead of the outcome of the election.

Euro/dollar implied volatility surged to 19 per cent, its highest level since the depths of the market mayhem in March, compared with less than 7 per cent on Monday. Other indicators such as US dollar/yen volatility also surged.

Investors had taken a more cautious approach as the election neared. Rather than outright bets on a particular outcome, many traders have flocked to the safety of dollars so that they are well positioned to take advantage of volatility when results arrive.

"Those who haven't hedged yet, but who would feel the pain in case of strong moves, should hedge themselves as soon as possible, as it is getting increasingly expensive," Commerzbank strategist Antje Praefcke wrote to her clients in a note. REUTERS