US Elections: Dollar drops to lowest level in two years on prospect of Biden win

The dollar dropped for a third day to its lowest level in more than two years as Joe Biden looked increasingly likely to claim the US presidency and traders geared up for a Federal Reserve policy decision.

The Bloomberg Dollar Spot Index fell as much as 1 percent to the lowest since May 2018. That came as the euro rallied 1.1 percent and the yen strengthened past 104 per dollar, a resistance level dating back to 2016 that was broken briefly during virus-induced market panic in March.

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“The dollar has been declining as a result of the increasing likelihood of a Biden victory,” said Sonja Marten, a currency strategist at DZ Bank AG. “For now, the dollar is trading as a safe haven and the prospect that we are going to get a clear election result sooner than some had feared is currently reflected in rising risk appetite, and hence a weaker dollar.”

Investors have been bracing for such a slide from a Biden win that could pave the way for more stimulus. But the possibility of a large fiscal package has dimmed under prospects of a divided Congress, with Republicans keeping control of the Senate. Such an outcome could push the Fed, which announces its decision later Thursday, to take a more dovish turn.

Fed Chair Jerome Powell “will probably continue to reinforce the idea that the Fed is ready to add stimulus if needed, said Alvise Marino, a foreign exchange strategist at Credit Suisse Group AG. “But any added commentary here would expose him to risks of being viewed as politicized. And monetary policy is already in a tricky place.

A lack of robust fiscal stimulus would more than likely lead to an expansion scope of the current Fed policy as opposed to adding new monetary instruments, Marino said.

The weaker greenback could see dollar-yen drop to the 102 or 103 level by year-end, and below 100 in the later part of 2021, according to JPMorgan Chase & Co. strategist Tohru Sasaki.

The Fed’s monetary policy will drive the dollar lower, while the yen tends to appreciate during Democratic presidencies, Sasaki said. A drop in trade tension with China under a Biden administration may also reduce demand for the dollar as a haven, he said.