Dollar Hedging Costs Surge as Traders Brace for US Election Volatility

The cost of hedging against dollar fluctuations has soared to its highest in nearly two years. Traders are preparing for potential market volatility following the upcoming U.S. presidential election. The Bloomberg Dollar Index’s one-week implied volatility measure recently reached a peak not seen since December 2022, during a period of economic recession fears.

This rise suggests that traders expect significant movement in the dollar against major currencies such as the euro, yen, and Mexican peso, increasing the cost of options to protect against such volatility. According to a forex strategist, the election represents a binary event for the market, driving demand for currency hedges related to the election. Emerging market currencies like the peso and won are viewed as particularly sensitive to the U.S. election outcomes.

In October, the dollar index has increased by more than 3%, on track for its largest monthly gain since September 2022. Derivatives traders are currently bullish on the dollar, as expectations for aggressive Federal Reserve rate cuts have cooled, suggesting U.S. yields may remain higher than in other regions.

The election outcome may further favor the dollar. Uncertainty over the results could lead investors to seek safe-haven assets. If Donald Trump wins, potential policy measures such as tax cuts and high tariffs on key trading partners could also increase inflationary pressures.