- Contested election may pull EUR -2% lower, Nomura says.

- MUFG sees -3% fall, EUR/USD sub-1.15 on Trump victory.

- EUR/USD still draws buyers as market bets big on Biden.

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EUR/USD spot rate at time of writing: 1.1733Bank transfer rate (indicative guide): 1.1322-1.1404FX specialist providers (indicative guide): 1.1557-1.1627More information on FX specialist rates hereThe Euro-Dollar rate has climbed back from late September lows in anticipation of a victory by Democratic Party presidential candidate Joe Biden in Tuesday's election, but could fall by two percent if the outcome is contested and more in response to a surprise victory by President Donald Trump, some analysts say.

Europe's single currency was trading comfortably back above the 1.17 handle on Tuesday after having been as low as 1.1620 in the prior session, amid strong and widespread gains for stocks, commodities and positively correlated currencies the world over.

Gains for risk assets built alongside losses for the Dollar as investors bet big that Joe Biden and the Democratic Party will clinch both the White House as well as the Republican dominated Senate on Tuesday, enabling them to govern unfettered for four years from January given their existing control of the House of Representatives.

But as investors and traders threw caution to the wind, a contested result remained a possibility and may have even become more likely after President Donald Trump criticised a Supreme Court decision at the weekend to allow postal voting to continue on election day in Pennsylvania, which will likely delay the result for the swing state.

"What does a contested outcome mean for markets? The short term/immediate impact on FX/rates markets can be significant depending on the outcome of the election. EUR/USD lower by 2% is a possibility in this scenario of prolonged uncertainty (fiscal stimulus during lame duck session drops to near zero probability for markets)," says Jordan Rochester, a strategist at Nomura. "However, even under the scenario of a contested election by Trump (if it’s about the need to wait for a full count of mails votes and/or fraud accusations), because of a small margin of victory in favour of Biden, we believe the negative impact on markets would eventually be limited in the long run."

Above: Euro-to-Dollar rate shown at hourly intervals alongside S&P 500 index futures (yellow line, left axis).

A contested election may mean weeks of uncertainty as points of contention are settled in court, which is investors' least preferred outcome, while the Euro would be unlikely to celebrate any victory by President Donald Trump.

The latter would assure renewed trade tensions between the U.S. and China while also keeping alive the possibility of a trade fight between Washington and Brussels. Joe Biden is less hostile toward the Chinese government and European Union than the incumbent, so is the Euro friendly candidate and preferred winner of risk currencies.

Another popular view is that a Biden-led White House would spend bigger than a Republican one, further widening the budget deficit while sinking the Dollar as a result. This is a part of why despite European Central Bank (ECB) concerns about currency strength, Nomura and MUFG still expect the Euro-Dollar rate to rise in the year ahead. Both tip a rise toward 1.25 as likely for 2021.

"A Biden victory along with taking the Senate is what appears most widely expected," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "A surprise Trump victory would likely see the dollar advance 2-3% especially if the Republicans hold on to the Senate. Trump in the White House but losing the Senate could weaken the dollar with Trump constrained in what he could do."

Polls close in some parts of the U.S. late in Tuesday's European evening while in other parts, ballots won't be counted until Wednesday. Investors will pay particular attention to Arizona, Florida, Georgia, Iowa, Michigan, Minnesota, North Carolina, Ohi, Texas and others - all swing states and among the first to report a verdict each election cycle.

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 index futures (yellow line, left axis).

Those states will be among the first to reveal if the polling industry and currency market has made the same mistake as in 2016, having underestimted voter support for Trump, which could take the Euro back below 1.15 if MUFG is right about this leading to a -3% fall.

"While we would expect a rally in EUR/USD to extend if today’s election yields a Blue Wave, we see several factors which would instead pressure EUR/USD. Irrespective of the factors influencing the USD, the shine has been coming off the EUR," says Jane Foley, a senior FX strategist at Rabobank. "Long EUR positions have been pared back, but they remain high compared with historical averages. At the same time, covid-19 is back and European politicians are continuing to bicker about the details of the Recovery Fund."

Investors bid the Euro sharply higher during the summer months while building up weighty bets against the greenback, taking 'net long' Euro positions recorded by the Chicago Futures Trading Commission near to record highs while pushing the net wager against the Dollar to its highest level since 2011.

Rising U.S. budget deficits combined with the regressive tax and regulatory policy bent of a Democrat White House were and still are likely to weigh on the Dollar next year, many analysts say, while the European Union's coroanvirus recovery fund was expected to bolster growth on the old continent.

Those wagers were recently reduced, although they remained near their highest for around two years in the week to October 24 and are still meaningful enough to risk causing a fish-in-a-barrel moment for Dollar bears in the event of a contested election or a surprise victory by President Trump on Tuesday.

"Even on a Blue wave, the covid-19 crisis suggest that there could be a limit to how far risk appetite can be boosted and how far the USD can fall," Foley says. "Over the medium-term, it can be assumed that higher taxation in the US could also be a headwind to risk appetite and a support for the USD. We are forecasting that EUR/USD will be at 1.16 on a 3 month view."

Above: Euro-to-Dollar rate shown at daily intervals alongside Dollar Index (yellow line, left axis).