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The dollar weakened and Treasuries advanced on Monday as global markets sharply reined in their bets on a victory for Republican candidate Donald Trump in the US presidential race.
The dollar fell 0.6 per cent against a basket of major currencies including the pound, euro and yen, putting it on course for its biggest one-day drop since September.
Yields on US government debt, which move inversely to prices, were lower and the Mexico peso strengthened after a closely watched poll over the weekend showed an unexpected groundswell of support for Democratic nominee Kamala Harris in Iowa, a state previously dominated by Trump.
The poll, run by non-partisan pollster J Ann Selzer and released late on Saturday, is considered the “gold standard” of opinion surveys in the state.
“There had been this election premium built in going into this week and that premium had largely been due to Trump gaining in the polls”, said Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays.
Kotecha estimated that a Trump “premium” in the dollar represented a 3 per cent appreciation in the dollar index. “If Harris wins we expect to see some of that premium unwound,” he added.
“There seems to be some [dollar] reversal today on the Iowa poll,” said Ju Wang, head of greater China foreign exchange and rates strategy at BNP Paribas, noting that Asian currencies broadly gained against the dollar on Monday.
Growing expectations of a Trump victory in the US presidential election on Tuesday, along with unexpectedly strong economic data, had driven the dollar to its largest monthly gain since April 2022.
The yield on the two-year Treasury fell 0.04 percentage points to 4.17 per cent, while the yield on the 10-year bond dropped 0.07 percentage points to 4.30 per cent.
Betting markets have also shifted sharply in the final days before the vote. The odds on a Trump victory have narrowed to 54 per cent on Kalshi, the US futures exchange, and to 58 per cent on Polymarket, the offshore cryptocurrency exchange. Last week, the marketplaces had priced a Trump win at 64 per cent and 67 per cent respectively.
Investors believe that if Trump wins and implements trade tariffs and tax cuts, inflationary pressures would rise, making it less likely that the US Federal Reserve will rapidly cut interest rates.
The Fed is expected to lower rates by a quarter of a percentage point on Thursday, two days after the election.
At the end of last week, the US economy recorded its weakest jobs report of the Biden administration, with just 12,000 jobs added, after disruption caused by hurricanes Helene and Milton and labour strikes. The figure was below a forecast of 100,000 from economists polled by Bloomberg.
“Trump polling gains have fed into dollar bullishness . . . but so has outperforming growth,” said Barclays analysts in a Sunday note.
Trinh Nguyen, senior economist for emerging Asia at Natixis, said that alongside the spectre of Trump tariffs, investors were also looking at Trump’s proposed corporate tax cuts: “The election and control of Congress has profound implications on US growth trajectory.
“There’s a lot of pent up investment that has been paused due to uncertainty over the [future of the] Inflation Reduction Act and corporate tax rates,” she said.
The Mexican peso, which many investors see as a straight Trump trade due to the country’s export dependency on the US, strengthened 0.9 per cent against the US currency, to 20.1 pesos to the dollar.
The yen and renminbi gained 0.8 per cent and 0.5 per cent respectively. The yen is still down more than 2 per cent against the dollar in the past month.
Bitcoin, which has risen on hopes of Trump victory, was down 0.7 per cent on Monday to $68,750.
Trump has positioned himself as the pro-cryptocurrency candidate, vowing to end a regulatory crackdown, and has won the support of major Silicon Valley crypto investors, including Andreessen Horowitz.