FOREX-Euro dips on French lockdown fears, U.S. vote drives volatility gauges up

Olga Cotaga
·3 min read

* Implied volatility rises in yen, euro

* Yen rises to 1-month high vs dollar, 3-month high vs euro

* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E (Updates prices, adds new comments and latest news)

By Olga Cotaga

LONDON, Oct 28 (Reuters) - The dollar rose against the euro on prospects of a national coronavirus lockdown in France, with implied volatility gauges in the common currency and the yen hitting multi-month highs as traders positioned for next week's U.S. election.

The dollar fell against the safe-haven Japanese currency, as disappointment that the United States has not yet found a way to push through another round of fiscal stimulus also weighed on market sentiment.

President Emmanuel Macron will give a televised address on Wednesday, amid media reports that the French government may impose a lockdown from midnight on Thursday.

The European Commission proposed on Wednesday a series of new measures to fight the COVID-19 pandemic in the European Union, saying the new spike in infections on the continent was "alarming".

With news that Pfizer Inc has not yet been able to determine how well its late-phase COVID-19 vaccine protects against the disease adding to the cautious mood, riskier assets fell across markets.

Novavax Inc, another company working on a new coronavirus vaccine, said it will launch the Phase 3 trial in the United States by the end of next month.

The euro was down 0.5% at $1.1738, while the yen rose 0.2% to 104.16 per dollar, its highest in more than a month.

The euro/Japanese yen fell 0.7% at 122.16, its weakest since July 20.

One-week implied volatility gauges in euro and yen rose to their highest in nearly seven months.

That suggests investors are preparing for sharp price moves, with the biggest focus on the United States as it struggles to contain its coronavirus epidemic as people vote early in large numbers for what promises to be a pivotal election on Nov. 3.

"Certainly, people are nervous, yes, but participation on the part of many investors is also very low too," said Stephen Gallo, currency analyst at BMO Capital Markets.

"We won’t get much further clarity on underlying investment trends until the noise of the U.S. election passes," he said.

Markets are pricing a high probability of a clear victory by U.S. presidential challenger Joe Biden, but some investors are sceptical because the polls did not predict President Donald Trump's win four years ago.

"This is why ... we have not seen the dollar strengthen as much as a result... Investors don't want to go long the dollar ahead of the (vote)," said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America.

Legal battles between Republicans and Democrats over how to count votes have also raised the risk that the outcome of the election will be disputed.

After the elections, the market's focus will again turn more towards the sharp rise in coronavirus infections, Vamvakidis added.

The dollar index, which tracks the currency against a basket of six currencies, edged up 0.3% at 93.46.

The yuan was flat at 6.7194 in the offshore market, with one-week implied volatility in the Chinese currency spiking to its highest since the beginning of 2016.

The People's Bank of China reportedly asked local Chinese banks on Tuesday to drop the Counter Cyclical Factor (CCF) in their daily fixing models.

"While we believe that this is a strong signal from the PBoC allowing weakness in the onshore yuan, in practice, banks have already been lowering the CCF in the last few months," said Lauri Hälikkä, fixed income and currency strategist at SEB.

"Thus, the effect of the change is very limited," Hälikkä said.

Elsewhere, the British pound also fell versus the dollar and was last down by 0.6% at $1.2969. Sterling stayed steady versus the euro at 90.45 pence. (Reporting by Olga Cotaga; editing by John Stonestreet and Marguerita Choy)