By Joseph Adinolfi and Sara Sjolin, MarketWatch , Hiroyuki Kachi

Politics likely to overshadow Fed decision, analyst says

The dollar and Mexican peso dropped on Wednesday as Democratic presidential nominee Hillary Clinton's lead in the polls continued to shrink less than a week ahead of Election Day, motivating investors to seek protection in safety plays like the yen and Swiss franc.

With Republican nominee Donald Trump taking the lead in some polls, the U.S. dollar fell against most major currencies, sending the ICE Dollar Index down 0.2% to 97.500.

Read:Currency traders are scrambling to hedge against a Trump victory (http://www.marketwatch.com/story/traders-are-scrambling-to-hedge-against-a-trump-victory-2016-11-02)

Read: Here's why everyone loves the Swiss franc during turmoil (http://www.marketwatch.com/story/heres-why-everyone-loves-the-swiss-franc-during-turmoil-2016-11-02)

The dollar remained lower after the Federal Reserve said it would leave interest rates steady, as was widely expected. But the central bank did say that the case for raising rates has continued to improve since the summer, which some market strategists interpreted as a hint that it could hike in December.

However, the central bank might again demure should Trump prevail in next week's election, strategists said.

Two of the currency market's most popular havens, the yen and the Swiss franc , strengthened on Tuesday, with the dollar touching its weakest level against the Japanese currency since Oct. 21.

One dollar bought Yen103.42 late Wednesday in New York, compared with Yen104.14 late Tuesday. Meanwhile, the franc hit its strongest level against the euro since the U.K. voted to leave the European Union on June 23 before paring its gains. It was essentially flat in recent trade, buying 0.927 euro.

The Mexican peso , which has been highly sensitive to developments in the U.S. presidential race, (http://www.marketwatch.com/story/why-its-too-late-to-bet-on-the-mexican-peso-2016-10-21) extended overnight losses to trade at 19.36 to the dollar late Wednesday, compared with 19.18 pesos late Tuesday.

Worries about Clinton's prospects in the election have escalated since the FBI reopened its investigation into Clinton's use of a private email server. Most market watchers believe Clinton would provide greater policy clarity and less uncertainty on trade negotiations.

Read:Chart shows investors less prepared for Trump win than they were for Brexit shock (http://www.marketwatch.com/story/are-stock-market-investors-complacent-about-a-clinton-election-victory-2016-10-31)(http://www.marketwatch.com/story/are-stock-market-investors-complacent-about-a-clinton-election-victory-2016-10-31)Also see:Stock market fear factor rises as Clinton-Trump race tightens (http://www.marketwatch.com/story/stock-market-fear-factor-rises-as-clinton-trump-race-tightens-2016-11-01)

"Markets are now having to price the realistic prospect of a Trump victory. In short, that means the dollar is being sold off, safe havens (gold, yen, U.S. Treasurys) are rallying, and risk plays (equities, emerging market assets) are under pressure as shown by the spike higher in the VIX volatility," Richard Perry, an analyst at Hantec Markets, said in a note.

Opinion: Hillary Clinton is irreparably damaged, even if she wins (http://www.marketwatch.com/story/hillary-clinton-is-irreparably-damaged-even-if-she-wins-2016-11-01)

In other currency trade, the euro continued to rise, touching a fresh three-week high of $1.1105 before retreating to $1.1095 late Wednesday. Still, the shared currency is up 0.3% from $1.1055 late Tuesday.

One British pound bought $1.2295 late Wednesday, compared with $1.2244 on Tuesday.

(END) Dow Jones Newswires

November 02, 2016 16:31 ET (20:31 GMT)

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