Trump success shocks global currency markets

New York - The dollar plunged as Republican Donald Trump pulled ahead in critical battleground states in the US presidential race, shocking foreign-exchange traders who had all but priced in a Clinton victory.

READ: Rand takes pummeling as Trump takes Ohio

A Trump win would be the second major jolt to foreign-exchange markets in less than five months after Britons voted in June to exit the European Union. The greenback fell as much as 3.5% against the yen, the biggest intraday decline since Brexit, 1.8% against the euro and 2% against the Swiss franc. Mexico’s peso plunged to a record.

A victory for Trump, 70, would spur a sea change in US policies that directly impact the greenback. The real estate magnate has promised to tear up US trade agreements, called China the “grand master” of currency devaluation and argued that a strong dollar damages American competitiveness.

He’s also accused Fed Chair Janet Yellen of playing politics, saying she’s kept rates too low during Obama’s tenure, and suggested that he will nominate someone else to lead the central bank once her term expires in 2018.

“This would be the biggest political upset in living memory,” said Jeremy Cook, chief economist at London-based World First UK. “The significance is almost unquantifiable.”

The dollar fell to 101.94 yen and sank to $1.1242 per euro as of 11.04pm in New York. Overnight implied volatility on the dollar-yen exchange rate climbed to the highest since November 2008.

Markets are now reassessing the likelihood of a Federal Reserve interest-rate increase next month, once a near certainty, as volatility intensifies.

The market-implied chance of a December rate hike plunged to 47%, based on US overnight indexed swaps that trade 24 hours a day, compared to 82% at 5pm The OIS-derived probability tends to be a few percentage points lower compared to calculations based on fed funds futures.

The US currency has risen since mid-August as signs of faster economic growth and accelerating inflation fueled bets for Fed hikes. The gains follow a two-year, 20% rally that abruptly came to a halt this year as policy makers repeatedly scaled back the pace of rate increases amid inconsistent data.

Tighter monetary policy in the US bolsters the allure of American assets - and in turn the greenback - relative to Europe and Japan, where central banks continue to undertake unprecedented stimulus to boost flagging growth and inflation.

The Mexican peso plunged as much as 11% to 20.37 per dollar. The move was expected by market analysts who saw the currency as a barometer for the election, rallying when Clinton advanced in the polls and falling when Trump gained ground.

Trump’s rhetoric has weighed on the peso in recent months as traders saw the country’s economy as particularly vulnerable to proposals such as building a wall on America’s southern border, seizing Mexican workers’ remittances and renegotiating the North American Free Trade Agreement.

Canada’s dollar tumbled. The nation’s two-way trade in goods and services with the US has surged since the accord between Canada, the US and Mexico came into force in 1994. The US is Canada’s largest foreign market, buying about C$400bn, or about 73% of the country’s exports last year, data compiled by Bloomberg show.

“The Bank of Canada is monitoring the U.S. election as an event risk considering the uncertainty it would bring to business investment in Canada and in the US,” Bipan Rai, a senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce in Toronto, said before the election.

“We can’t rule out the potential for further action from the BOC in the next couple of months,” he said, referring to a potential rate cut.

South Korea’s won and South Africa’s rand also tumbled.

Trump has locked up key battleground states Florida, Ohio and North Carolina. The aggregator RealClearPolitics deemed all three states “toss ups.”

“Trump is not a politician, he hasn’t been in the political arena making laws -- he’s more of an unknown quantity,” said Sinead Colton, San Francisco-based head of investment strategy at Mellon Capital Management Corp, before the election. His victory “certainly hasn’t been priced in by markets.”