By Harry Robertson

LONDON (Reuters) – Indicators of expected currency volatility rose on Wednesday as investors prepared for a U.S. presidential election that could result in large changes in economic policy and swings in the dollar.

LSEG data showed that the one-week implied volatility of the euro-dollar currency pair rose to its highest level since March 2023, when the United States was grappling with the mini-banking crisis. It was expected to be the biggest single-day boost since 2017.

The implied one-week volatility of the sterling dollar also reached its highest level since March. The measures are derived from option prices, which investors apply to hedge against and place bets on movements in the base currencies.

Weekly options contracts now cover the day after the Nov. 5 election, in which former Republican President Donald Trump and Democratic Vice President Kamala Harris are neck and neck in the polls.

However, investors in recent weeks have been taking cues from betting markets, which have shown increased odds of a Trump victory, which could lead to higher tariffs and a budget deficit that could potentially push U.S. interest rates higher and strengthen the dollar.

“The binary nature of next week’s competition implies significant currency movements after the event,” Barclays strategists led by Marek Raczko said in a research note.

“The market expects the main currency reaction to materialize in the week before the elections. This can be justified by two things: first, the result may still be uncertain the day after the election, and second, the Fed (US Reserve) meeting will be held in the same week.”

On Tuesday, the rate rose to the highest level in three months of 104.63, partly due to the recent good data from the US and partly due to investors’ growing expectations for Trump’s victory.

The previous US election generated an even greater response in the run-up to the event. In the week before the 2016 election, which Trump won, weekly implied volatility for the euro reached almost 14%, while weekly volatility for sterling reached 13%.