The US Dollar dipped slightly on Tuesday, ahead of an expectedly tight presidential election, with the results potentially prompting big moves in foreign exchange.
Latest The US Dollar Index, which measures the US dollar against six other major currencies, fell 0.13% to 103.655, after falling overnight to its lowest level since October 21, compared to its highest level since late July last week.
The US dollar was hit, largely due to reduced "Trump trade", as the latest polls showed Donald Trump and Kamala Harris would be competing in a tight presidential election, with most polling starting early Wednesday Malaysia time.
In recent weeks, financial markets have been leaning towards the victory of Trump, whose tariff and immigration policies are considered inflationary by analysts, leading to an increase in US yields and the US dollar.
"With the US election being seen as intense, as well as the possible ripple effect on the currency market, the currency market is currently trading at a reasonable level of volatility," analysts at ING said in a note.
"Given the strengthening of the US dollar in October, we think only a complete victory of the Republic can push the dollar further. A Harris win may indicate a more desirable and negative outcome for the dollar.”
The US Federal Reserve will also meet this week, and markets are bracing for another rate cut, this time by 25 basis points compared to September's massive 50 basis point cut.
Traders will be scrutinizing further indications from Fed Chairman Jerome Powell on the bank's plans to further cut rates, especially as the latest data points to persistent US inflation and resilience in the economy.
However, the labor market is also showing signs of deterioration, which may make the Fed more likely to ease further.
In Europe, the Euro strengthened by 0.2% to 1.0893 against the US dollar, after climbing to 1.0914 in the previous session, for the first time since October 15, with the euro benefiting from dollar weakness.
Despite this strengthening, the euro has to contend with regional economic weakness, with French industrial production down 0.9% in September, as well as political uncertainty surrounding the US election.
"For this week, the expectation is that the impact of the US election will dominate," added ING. "Ultimately, a Trump victory without a House of Representatives could be the worst-case scenario for EUR/USD towards the end of 2025, where global growth will not be supported by US tax cuts and the ECB may be forced to cut rates to more accommodative levels."
GBP/USD strengthened 0.2% to 1.2980, with the Bank of England expected to approve a 25 basis point rate cut on Thursday.
AUD/USD strengthened 0.5% to 0.6618, after the Reserve Bank of Australia kept policy unchanged on Tuesday, as widely expected.
RBA Governor Michele Bullock, however, took a tougher line in her press conference, saying she still believed there was a risk of inflation rising.
"The Australian dollar could be a big winner if Harris defeats Trump. In such a scenario, the threat of tariffs against China will be significantly reduced," said ING.
