Investing.com — The US dollar is generally trading above its implied fair value, potentially hinting at support from a recent uptick in the chances that Donald Trump will win November’s US presidential election, according to analysts at UBS.

However, they noted that the greenback remains within its standard deviation bands, which help account for volatility in movements in the currency. This suggests that “any dollar-positive election risk premium is still moderate,” the analysts said.

Over the past month, a gauge comparing the dollar to a basket of its currency pairs has climbed by more than 3%.

The move comes as prediction markets like Kalshi and PredictIt show Trump is the clear favorite to emerge victorious following the Nov. 5 ballot.

However, these bets have received some scrutiny because they have diverged from national polling averages, which indicate that Trump’s Democratic rival Kamala Harris holds a narrow advantage with only two weeks of campaigning left. Crucially, both candidates are all but tied in several key battleground states that are tipped to have a heavy impact on the outcome of the election.

A victory for Trump, who has called for tax cuts, looser financial rules and sweeping tariffs, could provide some support to the dollar, analysts have said. For example, his proposal to impose a blanket levy on imports into the US could dent Asian and European exporters, possibly leading local central banks to slash interest rates. This would, in turn, potentially weaken their currencies and bolster the dollar.

Speaking to Bloomberg News last week, Trump dismissed concerns these trade policies would hit the US economy, arguing that they would instead help “bring companies back to our country”.

Outside of the election, analysts cited by Reuters have said the dollar has been boosted by expectations that overseas central banks will likely have to cut interest rates deeply because their economies are not growing as fast as the US. Meanwhile, uncertainty still surrounds the pace of the Federal Reserve’s much-anticipated policy easing cycle following a jumbo 50-basis point rate reduction by the central bank in September.

(Reuters contributed reporting.)

By Stefano Rebaudo

(Reuters) -The U.S. dollar was just off a 2-1/2 month high on Tuesday on expectations the Federal Reserve will take a measured approach in easing its policy, while a too-close-to-call U.S. election campaign kept investors on edge.

The dollar’s strength, boosted by rising Treasury yields, kept pressure on the yen, euro and sterling, a theme that has been building over the past few weeks as traders scale back their bets on rapid U.S. rate cuts.

Benchmark 10-year Treasury yields rose 3 bps in London trade to a fresh 12-week high as investors priced for a more robust American economy.

Some analysts argued that the release of the Beige Book late on Wednesday could be the biggest threat to the greenback this week, with the previous summary of economic conditions regarded by some as the main trigger for the 50-basis-point-(bp)-rate cut in September that kicked off the Fed’s easing cycle.

Markets are pricing in an 87% chance of the Fed cutting rates by 25 bps next month, versus a 50% chance a month earlier, when investors saw an equal likelihood of a larger 50-bp cut, the CME FedWatch tool showed.

Traders are anticipating another 40 bps of easing overall for the rest of the year.

“The U.S. dollar rose recently on the hawkish repricing of expectations for the Fed monetary policy and because uncertainty regarding U.S. elections reduced risk appetite supporting safe-havens,” said Nick Andrews, strategist at HSBC.

However, U.S. elections are still the main focus.

Markets expect the strongest dollar response from a Republican sweep, which should open the door to larger increases in trade tariffs in combination with fiscal stimulus.

A smaller rally for the greenback is seen in response to a divided Republican government outcome, while a Democratic sweep or a divided Democratic government would likely result in some initial downside.

The , which measures the U.S. currency versus six others, was last at 103.91, having touched 104.02 on Monday, its highest since Aug. 1. The index is up more than 3% so far this month.

The euro last bought $1.0827, near its lowest since Aug. 2, while sterling was at $1.3006, near its lowest since Aug. 20.

Euro zone PMI data on Thursday could provide an additional downward push to the single currency if it underlines the poor economic situation in the euro area and boosts bets on future European Central Bank rate cuts.

ECB speakers will also be in focus after President Christine Lagarde delivered a dovish message last week.

“The key question is: are the hawks fine with Lagarde’s sanguine disinflation view, a gradual shift in focus to growth and such a dovish market pricing?” said Francesco Pesole, forex strategist at ING.

“Given some lingering pockets of sticky services inflation in the euro zone, the answer is probably no.”

ELECTION IN FOCUS

With the U.S. election just two weeks away, the rising odds of former President Donald Trump winning are boosting the dollar, since his proposed tariff and tax policies are seen as likely to keep U.S. interest rates high.

“Even small changes in tight polls could drive seemingly erratic swings in market sentiment,” said Antti Ilvonen, forex analyst at Danske Bank.

The yield on the benchmark U.S. 10-year Treasury note rose to its highest since July 26 at 4.22%.

That weighed on the yen, which was roughly unchanged at 150.88, after touching a near three-month low of 151.10 per dollar.

The Bank of Japan is carefully looking at the upside risks from rising import prices as the yen weakens, Executive Director Takeshi Kato was quoted as saying by Jiji Press on Tuesday.

The yen weakness comes with Japan set to conduct a general election on Oct. 27. While opinion polls vary on how many seats the ruling Liberal Democratic Party will win, markets have been optimistic that the LDP, along with junior coalition partner Komeito, will prevail.

Barclays expects a suppression of pricing of BoJ rate hikes and an increase in fiscal concerns, driving the yen higher if the LDP/Komeito coalition has to form a government with additional coalition partners.

It also forecasts that in the unlikely event (tail risk scenario) of the LDP and its coalition partner Komeito being unable to form a government, risk-off moves could drive a sudden 2% drop in the dollar/yen exchange rate.