US election risk drives dollar hedging costs to 18-month high

Polls show Vice President Kamala Harris and former President Donald Trump remain neck-and-neck in the race.

Traders are rushing to hedge against swings in the US dollar as a presidential election that remains too close to call approaches.

The cost of one-month option contracts tied to the Bloomberg Dollar Spot Index — which for the first time capture the November 5 vote — jumped the most in two years on Friday, to the highest since March 2023.

Polls show Vice President Kamala Harris and former President Donald Trump remain neck-and-neck in the race. That’s a nightmare for traders, who have to weigh the radically different paths for the dollar that their economic policies could prompt.

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For some, it’s been easier to avoid trading the US currency altogether, choosing instead strategies that stand to profit irrespective of how the greenback fares. Long-term investor positioning in the US dollar was the most neutral in two-and-half years at the end of September, according to State Street Global Markets.

But investors are now taking a more active approach to shielding their portfolios. That impetus is also showing up across Group-of-10 currencies. One-month implied volatility on the euro reached the highest since June on Friday. The equivalent contract for sterling hit a one-year high.

Still, options traders are increasingly optimistic on the dollar as confidence on another big interest-rate cut from the Federal Reserve fades. The greenback’s one-month risk reversals, a barometer of market positioning and sentiment, are at the most bullish level in nearly three months.

Money markets pared expectations for another half-point rate reduction in November or December after Chair Jerome Powell said the economy is on good footing. Pricing now implies just a 30% chance of a 50-basis-point next month, down from 60% a week ago.

© 2024 Bloomberg

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