Tension rises as U.S. election enters home stretch; dollar gains

[November 02, 2020]  By Olga Cotaga

LONDON (Reuters) - Tension grew on Monday before Tuesday's presidential election in the United States, with safe-haven currencies like the yen and dollar holding firm.

Expected swings in the major currencies climbed to their highest since April as investors waited for the outcome of a election that will have serious implications for the dollar's outlook over the coming months.

Democratic challenger Joe Biden leads in national opinion polls, but the race looks close enough in battleground states that President Donald Trump could win the 270 Electoral College votes needed to win.

A Biden win is would probably hurt the dollar, on expectations of a large fiscal stimulus package. A surprise Trump victory could stoke widespread uncertainty in the short term.

"Volatility is rising because liquidity for hedges around the election is very thin. Everyone's the same way, there's no one selling this stuff thinking everything's great," said Jordan Rochester, forex analyst at Nomura. Generally, traders are hedging for decline by the euro and a rise by the dollar.

The dollar rose 0.1% versus the Japanese yen to 104.73 <JPY=EBS>.

One-week implied volatility gauges for the euro <EUR1WO=R> and the yen <JPY1WO=R> were both above 11%, their highest since beginning of April.

CASES SURGE

A surge in global coronavirus cases continued to weigh on sentiment, with the euro coming under pressure in recent weeks. The dollar held its gains after posting the largest weekly percentage rise since late September in the previous trading session.

The euro last fetched $1.1648 <EUR=EBS>, neutral on the day, having fallen earlier in the session. According to the latest Commodity Futures Trading Commission data, hedge funds have reduced their long positions in the euro to the levels last seen a month ago. <EURNETUSD=>

The British pound inched lower on coronavirus worries, after Prime Minister Boris Johnson announced over the weekend a one-month lockdown across England.

Sterling fell to its weakest in two-and-a-half weeks at $1.2854 <GBP=D3>. It was last trading at $1.2919, down 0.3% on the day.

In Europe, new COVID-19 cases have doubled in five weeks, a Reuters tally showed, with total infections surpassing 10 million.

"The U.S. dollar is continuing to benefit from the deteriorating outlook for growth in Europe," said Lee Hardman, currency analyst at MUFG.

Besides the U.S. presidential election, this week is filled with economic data, including PMI data from the United States, euro zone and elsewhere, as well as U.S. non-farm payrolls and Chinese trade.

Graphic: euro yen vols - https://fingfx.thomsonreuters.com/
gfx/mkt/jbyvrxawwve/euro%20yen%20vols.png

(Reporting by Olga Cotaga, editing by Larry King)

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