Elevated Market Volatility Amid US Election
Financial markets are experiencing heightened volatility, but investors should be cautious of reactive moves, as initial responses may not be the final ones. With polls closing in a closely contested US election, markets are bracing for potential asset swings. The US dollar has surged 1.7% in anticipation of a Trump victory, marking what could be the largest increase in the dollar index since March 2020 if it sustains.
Trump Gains Early Advantage as Markets Respond to Election Dynamics
Donald Trump has gained an early lead in the race for the White House, securing victories in the critical swing states of North Carolina and Georgia. He is also leading in key Rust Belt battlegrounds—Pennsylvania, Michigan, and Wisconsin.
Globally, markets are reacting to the increasing likelihood of a Trump victory. Stock futures are climbing, Bitcoin has reached an all-time high, Treasury yields are rising, and the US dollar index is nearing its highest level in a year. Across G10 currencies, only the Canadian dollar remains relatively steady, while the euro has dropped more than 2%, reflecting concerns that a second Trump term may bring universal tariffs that could impact open economies like the Eurozone. The Mexican peso, often seen as an election indicator, has fallen by over 2.5%.
The British pound has held up comparatively well but is still down 1.4%, trading in the mid-$1.28 range. Short-term declines are anticipated, especially if the election results lead to a "Red Sweep." Meanwhile, GBP/EUR has risen by 0.5%, approaching €1.20 as the euro weakens further against the dollar.
Election on a Knife’s Edge: Markets Brace for Potential Shifts in Policy and Rates
Investors are viewing this closely contested election as a defining moment, with significant economic implications. A Republican victory in the White House and both chambers of Congress raises concerns that Trump’s mix of tariffs and tax cuts could fuel inflation and drive up interest rates.
The US dollar continues to rally alongside a sharp rise in Treasury yields, driven by speculation that Trump’s policies might keep US rates elevated. Gains in the dollar align with a bond market sell-off as traders adjust to a tight race between Trump and Vice President Kamala Harris. Beyond the election outcome, growth and interest rate differentials are likely to support the dollar; however, given its recent October gains, a "Red Sweep" may be necessary to push the dollar substantially higher. A Harris victory could present a more stable, dollar-negative scenario, while a Trump win without the House or a contested result could bring further market uncertainty.
Polling data suggests a 98% probability of a Trump victory, yet critical battleground states remain too close to call. This uncertainty leaves room for potential reversals in currency markets, echoing patterns seen in previous election cycles.
