Dollar Higher; Uncertainty Climbs with Tight Election

The dollar pushed higher in early European trade Wednesday, with risk-sensitive currencies weakening, as the U.S. presidential election was seen as too close to call, suggesting a period of heightened uncertainty.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.6% at 94.115. It had shed 0.9% on Tuesday, its biggest daily drop since late March as traders had bet on a clear cut victory for Democrat candidate Joe Biden.

Additionally, EUR/USD fell 0.6% to 1.1638, GBP/USD dropped 1% to 1.2928, USD/JPY rose 0.4% to 104.91, while the risk sensitive AUD/USD fell 1.3% to 0.7065.

Incumbent President Donald Trump has won Florida, Iowa and Ohio, critical battleground states, undercutting the earlier expectations of a decisive victory for Biden.

Several key states, including Michigan, Pennsylvania and Wisconsin, are still counting, and traders are now bracing for the possibility that the election results may not become clear on Wednesday, with markets hedging against the risk of a contested election.

“One of the few things clear so far is that we are not going to see a Democrat landslide win as polls had suggested. That has wrong-footed an FX market which was positioned for some clarity,” said analysts at ING, in a research note.

A win for Biden had been expected to lead to a large stimulus to support the economy, while he was also seen as being less confrontational in trade issues with China and other trade partners than Trump.

USD/CNY rose 0.6% to 6.7188, with the yuan falling despite China’s services sector growing for the sixth consecutive month in October, as the world’s second largest economy continued to rebound strongly from its coronavirus hit.

The Caixin Services Purchasing Managers Index grew to 56.8 in October, higher than the previous month’s 54.8 reading and above the 50-mark separating growth from contraction.