Trump's victory is in doubt! Hedge funds are turning around at the last minute, betting on a decline in the dollar

The U.S. presidential election is entering its final sprint, with Kamala Harris and Donald Trump having similar support rates, leaving the question of who will take over the White House full of suspense. Meanwhile, hedge funds that previously bet on Trump are taking action, massively buying put options on the dollar—if Harris wins the presidential election, these options will profit from a weaker dollar.

On Monday, some bullish bets on the dollar were closed, with the Bloomberg Dollar Index dropping more than 0.7% at one point, marking the largest decline since August this year.

Some traders went further—massively buying call options on the euro and Australian dollar against the U.S. dollar.

On Monday, the nominal trading volume of euro against the U.S. dollar call options expiring in November at the U.S. Depository Trust & Clearing Corporation exceeded 200 million euros (218 million dollars), more than 2.5 times the trading volume of put options. If the euro strengthens against the dollar, these options will benefit. Additionally, DTCC data shows that the ratio of nominal trading of call options to put options for 100 million Australian dollars or more expiring in November is about 2.5:1.

In summary, traders across various foreign exchange markets are preparing for the U.S. election, with many adjusting their investment plans at the last minute to respond to this closely contested campaign.

How much will the dollar fall if Harris wins? Which currencies will benefit?

Kamala Harris is now gaining significant momentum. The latest poll results from Iowa show that Harris's support has risen to a level comparable to Trump's, whereas just a few weeks ago, the public generally believed Trump was a sure winner.

This change has prompted leveraged funds to reassess the election results, leading to a significant retreat of the dollar, with positions in the currency options market worth over 300 billion dollars betting on a dollar decline.

Mukund Daga, head of Asian foreign exchange options at Barclays in Singapore, stated: “Capturing the reversal of the dollar trend through foreign exchange options, we find that hedge funds show some interest in a weak dollar trend, mainly towards the Australian dollar and euro.”

He noted that after the poll results were released, call spread options for the Australian dollar against the U.S. dollar with maturities ranging from one week to one month became favored by clients.

Morgan Stanley's latest research report indicates that a Harris victory could be bearish for the dollar, while a Trump victory would be bullish.

The report points out that since early October, part of the dollar's rise has been influenced by expectations of a Trump victory. The Australian dollar, Swedish krona, and Japanese yen show higher negative risk premiums, while the euro, Swiss franc, and offshore yuan have smaller negative risk premiums. However, in the case of a Harris and Democratic victory, the Australian dollar against the U.S. dollar, Swedish krona against the U.S. dollar, and Japanese yen against the U.S. dollar may have the greatest upside potential.

Citigroup strategist Daniel Tobon predicted in a report: “If Trump wins, the dollar may rise by 3%, while if Harris wins, the dollar may fall by about 2%.”

Volatility Soars

Against the backdrop of political uncertainty in the U.S., the one-week implied volatility of the euro against the U.S. dollar (an indicator measuring the expected movement of this currency pair during this period) has soared to its highest level since March 2023. The volatility of the Australian dollar against the U.S. dollar has risen to its highest level since December 2022 "If Harris wins, the threat of additional tariffs will diminish," said Ashvin Murthy, Chief Investment Officer of AVM Capital in Singapore. "We will see all major exporting countries to the U.S. perform well in their currencies, while the dollar will give back most of its gains from the past month."

On Tuesday during the Asian trading session, the Bloomberg Dollar Spot Index was basically flat. The index rose 2.9% in October, marking the largest increase in two years, as the market bets on Trump winning the presidential election.

"Part of the Trump trade is to go long on the dollar, but the Iowa polls have indeed accelerated the reconsideration of bullish dollar bets," said George Boubouras, Head of Research at hedge fund K2 Asset Management. "As voting progresses, the options market will only become more volatile."