LONDON: Investors globally are turning to the US dollar and betting on rising volatility ahead of a crucial two weeks when the US and Japan will elect their leaders, the three major central banks will decide interest rates and the new UK government will announce its budget.

The US currency hit a three-month high this week in response to the strong US economy and the potential for Republican former president Donald Trump to win the November 5 election.

Meanwhile, indicators from financial contracts called options, which are used to hedge against market fluctuations, show that investors expect a jump in foreign exchange and bond volatility next month.

Stocks remain generally calm on strong US data and earnings; However, the VIX index, which shows expected fluctuations in the stock market, is above the 2024 average, signaling possible turbulence ahead.

“We’re going to have a pretty incredible, volatile two weeks,” said Ales Koutny, head of international interest rates at Vanguard, which said it sold some assets for cash.

“We will start to get some increased volume and that will only calm down the week after the (U.S.) election.”

TRUMP TRANSACTIONS

In the polls, Trump is neck and neck with Democratic Vice President Kamala Harris. But investors are taking their cues from betting markets, where the odds have tipped in Trump’s favor.

The dollar has gained more than 3 percent so far in October as bond yields climb toward three-month highs; This was partly because markets were bracing for potentially higher U.S. tariffs that could increase inflation and strain the Federal Reserve if Trump wins. To keep rates higher.

Trade concerns helped raise a gauge of volatility expected next month in the euro to the highest level in the last 18 months.

“We shifted the portfolio defensively,” said Marlborough fixed-income portfolio manager James Athey, adding that he expected the dollar to rise further and reduced his exposure to U.S. government debt in favor of German bonds.

Investors wary of inflation and populism are flocking to gold, Bank of America said on Friday, while Citi data showed hedge funds piled into the dollar.

The International Monetary Fund warned this week that markets may be underestimating risks from geopolitics and upcoming elections.

USA JUGGERNAUT

However, the biggest driving force of the dollar was the relentless economic power of the USA. Stronger-than-expected employment data, retail sales figures and unemployment applications figures caused investors to reject the Federal Reserve’s interest rate cut claims.

November 1 employment data for October could be a flashpoint; It feeds into the Fed’s rate decision six days later, where traders who previously saw a strong chance for a second 50 basis point cut now expect a 25 basis point cut.

Bond yields rebounded as traders struggled to make up their minds about the Fed, pushing a measure of expected volatility in the $27 trillion Treasury market to 10-month highs.

The CBOE Skew index, which measures demand for financial contracts called options that pay when stocks experience big declines, is also generally near levels that signal concern.

Overall stocks remained relatively calm, with the S&P 500 index down a modest 0.9 percent this week.

Oliver Blackbourn, multi-asset manager at Janus Henderson, said strong US data along with strong earnings from companies such as Tesla were keeping the stock market calm.

Artemis fixed income manager Liam O’Donnell said he bought five-year Treasuries in the last two days and thinks markets are overestimating how high U.S. interest rates will stay if Trump wins. SURVEYS, POLITICS

Meanwhile, Britain’s Labor government will present its first budget on Wednesday after coming to power in July, ahead of the Bank of England’s interest rate decision on November 7.

Memories of the bond market rout that followed Prime Minister Liz Truss’s disastrous 2022 budget loom over the episode.

British government bond yields rose sharply on Thursday after finance minister Rachel Reeves said she would change fiscal rules to allow it to borrow more to invest.

Allianz Global Investors, PIMCO, abrdn and Artemis say that they are interested in gold and their bet returns have increased significantly.

“We recently initiated a long position in gilts,” said Linda Raggi, senior investment manager of fixed income at Pictet Asset Management. “We believe the budget will be focused on supporting growth (and) we think Gilts have room to outperform once the event risk has passed.”

Japan’s politics and central bank are also of great importance after interest rate hikes and a rise in the yen helped create chaos in markets around the world in August.

Japan’s ruling Liberal Democratic Party could lose its majority in Sunday’s early elections and potentially form a coalition with opposition parties that support monetary stimulus.

The Bank of Japan is expected to keep interest rates steady on Oct. 31, and investors will be watching for clues about the outlook that could steer the yen, which has lost more than 8 percent of its value since mid-September.