(Bloomberg) -- 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 Nov. 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.
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.
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