LONDON: The dollar eased on Tuesday as traders balanced positions ahead of what is expected to be a close US presidential election, while options volatility soared after recent polls rattled some market bets on a victory for Republican Donald Trump.

Democrat Kamala Harris also saw improved odds on election betting sites and had a slight lead on PredictIt overnight, although Polymarket continued to list Trump as the favorite.

In recent weeks, financial markets and some betting platforms were leaning heavily toward a victory for Trump, whose tariff and immigration policies are seen as inflationary by analysts, leading to higher U.S. Treasury yields and gains for the dollar.

The U.S. currency suffered a setback Monday after a weekend opinion poll showed Harris with a surprise lead in Iowa, a traditional Republican stronghold. Overall, polls continue to show a close race.

Hours before the first results appeared overnight, the dollar was broadly stable against a basket of currencies.

Traders were less optimistic about the outlook for the next 24 hours and rushed to hedge against potentially huge swings in the prices of currencies particularly sensitive to the election outcome and U.S. trade policy, such as the euro and the Mexican peso. .

Overnight options volatility reached its highest level since 2016 for the euro and peso.

“The most important thing is this sharp rise that we saw overnight,” said Michael Brown, senior research strategist at Pepperstone.

“Euro overnight flights are currently at their highest level since the Brexit referendum, which perhaps gives you an idea of ​​some of the moves markets are preparing for over the next 24 hours. ”

Euro overnight volume reached its highest level since November 2016, according to LSEG data, but on other platforms it reached its highest level since June 2016, when Britain voted to leave the European Union.

Implied volatility in options reflects traders’ demand to buy protection against wild price swings, which does not always reflect underlying market action.

“Today it’s all ‘wait and see’. No one will have any conviction until we have the first results overnight and that’s when you will see the markets start to move ” Brown said.

The euro rose 0.17 percent to $1.08955, while the pound sterling rose 0.2 percent to $1.2987 and the yen was broadly flat on the day at 152.275.

“We believe financial markets are now positioned for a Harris victory,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia.

“So the dollar could fall slightly by 1 to 2 percent this week if Vice President Harris wins, and rise significantly if (former) President Trump wins,” she said. “Any delays and/or disputes regarding vote counting may also worsen currency volatility this week.”

UNCERTAINTY ALL AROUND

The winner may not be known until days after Tuesday’s vote, although Trump has already signaled he will try to fight back any defeat, as he did in 2020.

Bitcoin rose 2.7% to $68,893, after hitting a one-week low of $66,776.19 earlier. Analysts view Trump as adopting more cryptocurrency-friendly policies than Harris.

Further complicating the situation for traders this week is Thursday’s Federal Reserve policy meeting, in which the US central bank is expected to cut interest rates by a quarter point. Markets will focus on any hint that the U.S. central bank may skip a December cut, after last week’s monthly jobs report showed employers created far fewer jobs than economists expected. expected in October, raising questions about the degree of weakness in the labor market.

The Bank of England, Sweden’s Riksbank and Norway’s central bank will also hold policy meetings on Thursday.

The Reserve Bank of Australia kept its policy unchanged on Tuesday, as widely expected, and retained the wording of its statement that “policy will need to be sufficiently restrictive until the board is satisfied that the inflation evolves sustainably towards the target range.

RBA Governor Michele Bullock was more hawkish at her press conference, saying she still believed there were upside risks to inflation.

The Australian dollar rose 0.58 percent to $0.6624, regaining its footing after hitting its lowest level since August 8 last week at $0.6537.

(Additional reporting by Kevin Buckland in Tokyo; editing by Shri Navaratnam, Kim Coghill and Emelia Sithole-Matarise)