By Sara Sjolin, MarketWatch , Hiroyuki Kachi

Politics likely to overshadow Fed decision, analyst says

The dollar and Mexican peso dropped on Wednesday, as uncertainty over the U.S. presidential election rose after polls pointed to a tighter-than-expected race.

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.

Investors also sought safety in the yen with the dollar buying Yen103.54, around its lowest level since Oct. 21. That compared with Yen104.14 late Tuesday in New York.

The Mexican peso , highly sensitive to developments in the U.S. presidential race, extended overnight losses to 19.38 pesos to the dollar from 19.18 pesos late Tuesday.

Most market watchers expect Hillary Clinton to win and believe the Democratic candidate would provide greater policy clarity and less uncertainty on trade negotiations. But worries have escalated since Friday when the FBI reopened its investigation into Clinton's private email server, prompting investors to seek the safety of the yen.

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)

"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, analyst at Hantec Markets, in a note.

The CBOE Volatility Index rose 2.5% to 19.02 on Wednesday.

"Politics are 'Trumping' the fundamentals and it is incredible to say, but the market is unlikely to pay too much attention to the FOMC meeting tonight if there are more polling revelations today," Perry added.

The Federal Open Market Committee will announce its rate decision at 2 p.m. Eastern Time.

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 pairs, the euro continued to rise, touching a fresh three-week high of $1.1105 from $1.1055 late Tuesday.

The pound bought $1.2261, compared with $1.2244 on Tuesday.

(END) Dow Jones Newswires

November 02, 2016 06:40 ET (10:40 GMT)

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