On Monday, as traders reduced their bets on the 'Trump trade', the US dollar fell against all major currencies. These trades have recently benefited from speculation that Trump is more likely to win against Harris in the election.

The Financial Times reported that the US dollar weakened on Monday as global markets reduced their bets on Republican candidate Trump winning the US presidential election.

(Screenshot source: Financial Times, United Kingdom)

The US Dollar Index (DXY), which tracks the US dollar against six major currencies, fell 0.6% during Monday's session, marking the largest single-day decline since September. By Monday's close, the index was down 0.4%.

Furthermore, the Bloomberg Dollar Spot Index fell 0.7% at one point, marking the largest decline since August, before the decline narrowed.

Poll results conducted by the Des Moines Register and Mediacom in Iowa over the weekend showed Harris leading Trump in Iowa, with 47% to 44% in support.

The poll results have shocked political observers, as no analyst had predicted that the Democratic candidate would defeat Trump in the state. Since the end of the US presidential primaries, neither candidate has campaigned in the state, and Trump easily won the state in the past two presidential elections.

Monex'sForex tradingAnalyst Helen Given stated: "Iowa polls are driving people to cut back on the so-called Trump trades. We won't see more substantial weakness until the actual results are revealed."

Harris is gaining momentum in some polls, but overall the election remains tense. Harris's odds on some betting sites have risen, with a slight lead on PredictIt, while Polymarket shows Trump is still more favored.

According to PredictIt's prediction, Harris has a 51% chance of winning on Tuesday, which marks the first time Harris has led Trump since October 9th (Trump's chance of winning is 49%).

Strategist Carol Kong from the Commonwealth Bank of Australia stated: "The market is currently pricing in a higher likelihood of Harris winning, which aligns with the trend in PredictIt betting market."

Closure of 'Trump trades' ahead of the U.S. election

Chief Market Strategist Karl Schamotta of Corpay pointed out: "The 'Trump trades' are closing out, with market forecasts and polls indicating a significant decrease in the likelihood of a comprehensive Republican victory."

Barclays' New York-based forex strategist Skylar Montgomery Koning said: "As the opinion polls shift in favor of Harris, the US dollar is facing pressure."

(Screenshot source: Financial Times, United Kingdom)

Citi strategist Daniel Tobon said: "The market quickly jumped into Trump trades in October, but is now closing out some positions. The market previously favored these Trump trades, but is currently reducing risk."

The market believes that Trump's tariffs and immigration policies may stimulate inflation, leading to an increase in US long-term bond yields and the dollar.

Schamotta added that tariff and uncertainty expectations will damage the prospects of other currencies. The forex market may see greater volatility under a new president's party controlling Congress.

(Screenshot Source: Bloomberg)

Analysts at TD Securities pointed out in a report: "If the Republican Party wins across the board (the so-called red wave), the US dollar may sharply rise, reigniting memories of US Exceptionalism, possibly related to tariffs, tax cuts, deregulation, and unfavorable effects on the Eurozone."

The report indicates that conversely, if the Democratic Party wins comprehensively (the so-called blue wave), it would be the worst outcome for the US dollar, as the market would unwind the "Trump trade" and safe-haven positions. The second-order impact is that the blue wave could weaken the US dollar, as higher taxes and more regulations could lead to US stock market underperformance compared to global markets.

Barclays' head of Asian FX and EM macro strategy, Mitul Kotecha, stated: "Leading up to this week, there has been this election premium, largely due to Trump's rise in popularity in the polls."

Kotecha estimates that Trump's "premium" represents a 3% rise in the US Dollar Index, "If Harris wins, we expect to see some of this premium unwound."

In the just past month of October, as expectations of Trump's victory in the elections grew stronger, coupled with unexpectedly strong economic data, the US dollar posted its largest monthly gain since April 2022.

Luca Paolini, Chief Strategist at Pictet Asset Management, mentioned that his company had reduced some exposure to the "Trump trade" last week. This is because the market was anticipating a Republican landslide, which was not reflected in the poll results.

Paolini pointed out, "There is an unsustainable gap between opinion polls and market expectations."