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.

Investors also sought safety in, two of the currency market's most popular safety plays.

Two of the currency market's most popularsafety plays, 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 Yen103.36 in recent trade, compared with Yen104.14 late Tuesday in New York. 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, ( extended overnight losses to 19.38 pesos to the dollar from 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, the Democratic candidatefor president, 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 (

( see: Stock market fear factor rises as Clinton-Trump race tightens

"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 wrote.

The Federal Reserve will announce its latest interest-rate decision at 2 p.m. Eastern Time, though few expect it to raise interest rates. Instead, investors will scrutinize the central bank's latest policy statement for clues about whether it intends to hike in December.

Opinion: Hillary Clinton is irreparably damaged, even if she wins (

In other currency trade, the euro continued to rise, touching a fresh three-week high of $1.1105 before retreating to $1.1086 in recent trade. Still, the shared currency is up 0.3% from $1.1055 late Tuesday.

One British pound bought $1.2313 in recent trade, compared with $1.2244 on Tuesday.

(END) Dow Jones Newswires

November02, 2016 10:41 ET (14:41 GMT)

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