DXY: US dollar index retreats as traders predict a Biden victory

DXY: US dollar index retreats as traders predict a Biden victory
Written by:
Crispus Nyaga
November 3, 2020
  • The US dollar index has retreated today as the US goes to vote.
  • Most market participants are predicting a Biden victory and a blue wave.
  • This would lead to more government spending and stimulus.

The US dollar index (DXY) has fallen by more than 0.80% today as traders remain optimistic about the election. The index is trading at $93.42, which is significantly lower than yesterday’s high of $94.30.

Dollar index
US dollar index has fallen ahead of election

US dollar rises as political risks ease

The dollar index is falling today as traders assess the risks posed by today’s vote in the United States. While polls have shown that Joe Biden will win the presidency, they also understand that polls tend to be wrong. They were wrong in the 2016 election and during the Brexit poll.

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The market hopes that the end of the election will bring clarity about US policies regardless of who wins. Also, it expects that policymakers in Washington will reach a new stimulus deal after the tumultuous election period.

Therefore, according to analysts, the dollar is falling because political uncertainty and stimulus risks are about to be done away with. That is because the greenback is often viewed as a safe-haven currency whose price rises when uncertainties increase. Indeed, other risk-sensitive assets like stocks have also rallied, with the Dow Jones and S&P 500 adding more than 1%.

According to some analysts, the dollar index is falling because investors are pricing-in a blue wave. That would mean more stimulus and record debt issuance. In a statement, Win Thin, an analyst at Brown Brothers Harriman said:

“It appears that markets are pricing in solid odds of a Blue Wave today, implying significant fiscal stimulus and debt issuance seen in 2021.”

On the other hand, according to ING, a Trump win would push the dollar higher. They wrote:

“The dollar would benefit, though with the Fed now targeting average inflation (and thus its stance should be skewed to the behind-the-curve approach) this should provide less support to USD than was the case during the first Trump mandate.”

Meanwhile, the dollar index is falling ahead of key market events. The Fed will start its monetary policy meeting tomorrow and deliver its rate verdict on Thursday. Analysts believe that the bank will leave rates unchanged but signal more easing in the December meeting.

On Friday, the dollar index will react to the nonfarm payroll numbers from the US. Analysts believe that the numbers will show that the economy added more than 600k jobs in October as the unemployment rare fell to 7.7%.

US dollar index technical outlook

dollar index
US dollar index technical chart

The dollar index is trading at $93.35, which is the lowest it has been since October 29. The price is along the lower line of the Bollinger bands while the Relative Strength Index (RSI) has moved from the overbought level of 73 to the current 65. Therefore, it seems like bears are in control, which means that the index’s next target will be $93.00. However, you should expect significant volatility once results start streaming in.