Currency Traders Flee to Havens as U.S. Election Roils Markets

  • Greenback weakens to three-week low against the euro
  • New poll puts Trump 1 percentage point ahead of Clinton

Political risks rattled foreign-exchange traders Tuesday, sending the dollar tumbling against the yen, euro and Swiss franc.

The greenback weakened to a three-week low against the euro after an ABC News/Washington Post tracking poll placed Republican nominee Donald Trump 1 percentage point ahead of Democratic rival Hillary Clinton a week before the U.S. presidential election. The yen rallied, while the franc strengthened against all its major peers. The Mexico peso fell to a three-week low, while the Brazilian real plunged.

With many still reeling from the U.K.’s surprise vote in June to exit the European Union, traders in the $5.1 trillion-a-day currency market are fleeing to traditional haven currencies to guard against the unexpected. The Federal Bureau of Investigation’s signal last week that it’s reopening an inquiry into Clinton’s use of private e-mail has revived the campaign of Trump, who has promised to tear up existing U.S. trade agreements and is viewed less favorably by investors in part because of a lack of policy clarity and what is perceived to be greater unpredictability than his democratic rival.

"The market is pricing a higher political risk premium into the dollar following the FBI probe announcement on Friday," said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. "Before then the market had pretty much priced out most of the risk of Donald Trump becoming president. Obviously, the markets had to reassess that view now."

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, fell 0.3 percent as of 5 p.m. in New York, after gaining 2.2 percent in October. The greenback dropped 0.7 percent to $1.1055 per euro and declined 0.6 percent to 104.15 yen. The franc rose 1.4 percent versus the dollar. The yen and franc are often in demand in times of turmoil as the nations of Japan and Switzerland run current account surpluses.

A Trump victory would reduce the odds of a Federal Reserve interest-rate increase this year, stalling a two-month rebound in the dollar, Hardman said. Fed funds futures show a 70 percent chance the U.S. central bank will raise rates by year-end, down from as high as 75 percent earlier in the day. The odds are based on the assumption the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.

Clinton has been holding onto a consistent lead over Trump prior to the FBI statement. Her odds of victory have fallen to 71.2 percent, according to poll aggregator FiveThirtyEight, from 81.6 percent last week.

"It’s really the U.S. election risk premium that’s been dominating the markets with the economic data kind of pushed to the back burner," said Vassili Serebriakov, a foreign-exchange strategist at Credit Agricole CIB in New York. "The race has gotten a lot tighter, it seems, since last Friday."

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