The safe-haven dollar rose on Wednesday, pushing the euro to one-week lows on prospects of a national lockdown in Germany and France as coronavirus cases surged, with implied volatility gauges in the common currency and the yen hitting multi-month highs as traders positioned for next Tuesday's U.S. election.
Germany and France were preparing to announce restrictions approaching the level of last spring's blanket lockdowns on Wednesday as COVID-19 deaths across Europe rose almost 40% in a week, while financial markets tumbled on fears of the likely economic costs.
The European Commission proposed on Wednesday a series of new measures to fight the COVID-19 pandemic in the European Union, saying the new spike in infections on the continent was "alarming".
Vassili Serebriakov, FX strategist at UBS in New York, said rising COVID-19 cases in Europe and around the world and the potential for renewed lockdowns have dented the market's appetite for risk.
With news that Pfizer Inc has not yet been able to determine how well its late-phase COVID-19 vaccine protects against the disease adding to the cautious mood, riskier assets fell across markets.
At the same time, traders are bracing for volatility going into and after the U.S. election.
Democratic presidential candidate Joe Biden leads Republican President Donald Trump nationally by 10 percentage points, according to a Reuters/Ipsos poll.
"We are seeing some position-trimming ahead of the election, with the market still short dollars," said UBS' Serebriakov.
"The expectation is for a Biden presidency and that is consistent with a weaker dollar story. But as some of the polls have tightened the last couple of days, markets are just taking some risk off the table given the uncertainty," he added.
The UBS strategist said a Biden administration is seen de-escalating trade tensions with traditional allies such as Europe and Canada, as well as China, which should improve market sentiment overall and weigh on the dollar as a safe haven.
In midmorning trading, the euro was down 0.5% against the dollar at $1.1736, after sliding to a one-week low.
The dollar though slipped 0.1% against the yen to 104.33 yen. Earlier, the greenback dropped to a more than one-month low.
The euro also fell 0.6% against yen to 122.44 yen, after earlier sinking to its weakest since July.
One-week implied volatility gauges in euro and yen rose to their highest in nearly seven months.
That suggests investors are preparing for sharp price moves, with the biggest focus on the United States as it struggles to contain its coronavirus epidemic ahead of the pivotal election next Tuesday.
Legal battles between Republicans and Democrats over how to count votes have raised the risk that the outcome of the election will be disputed.
The dollar index, which tracks the greenback against a basket of six currencies, was up 0.3% at 93.45.
Elsewhere, the British pound fell 0.7% versus the dollar to $1.2958.