FOREX-Dollar on defensive as markets on edge ahead of U.S. election outcome

The U.S. dollar was on the defensive and risk-sensitive currencies held firm early on Wednesday as markets remained jittery amid uncertainty over the outcome of the U.S. presidential election. U.S. President Donald Trump was projected to win Indiana's electoral votes, Edison Research said on Tuesday, the first state to be decided in the race against his Democratic rival Joe Biden.

The contest was still too close to call in several states and markets were on edge ahead of the final outcome, which may not be known for days. Some investors bet on a Biden victory, boosting riskier assets. A win for Biden, expected to be less confrontational in trade issues with China and other trade partners than Trump, will be a boon for currencies that have suffered from tariffs imposed by the president.

Biden is also expected to spend big on stimulus to support the pandemic-stricken economy, another positive factor for riskier currencies, though analysts caution that partly hinges on the outcome of the Congressional election. If Democrats win the Senate on top of the House of Representatives -- a so-called blue wave scenario -- a large spending is seen as likely while a Republican-controlled Senate is expected to block a part of Biden's agenda.

Currently Democrats are expected to narrowly win the Senate. "It seems like many people are betting on a victory by Biden. It is a complete risk-on trade," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

The euro fetched $1.1759, having climbed 0.2% in early trade to extend its gain so far this week to 0.9%. The British pound stood at $1.3078, after rising 0.3% early on Wednesday. It changed hands at 89.68 pence per euro, its strongest level in almost two months.

The Australian dollar stuck around a three-week high, last trading at $0.71825, even after the nation's central bank stepped up its monetary easing the previous day. The offshore Chinese yuan rose 0.4% to 6.6539 per dollar while the safe-haven yen moved little at 104.625 per dollar.

The dollar index measuring the greenback against a basket of currencies stood at 93.19, having shed 0.9% on Tuesday, its biggest daily drop since late March. The vote results will start to trickle in after 7 p.m. EST (0000 GMT) but counting could go on for several days and the final outcome may not be known for some time if the race is too tight.

A third of U.S. voters listed the economy as the issue that mattered most to them when deciding their choice for president while two out of 10 cited COVID-19, according to an Edison Research exit poll on Tuesday. The closer the vote is to call, the higher the risk the election will be contested, analysts also said.

"A contested election probably takes all of the SPX, Bond yields and the USD (at least versus majors) down meaningfully," said Alan Ruskin, chief international strategist at Deutsche Bank in New York.