By Kevin Buckland

TOKYO (Reuters) –

The dollar started Tuesday on the defensive as traders squared positions on the U.S. presidential election day, after recent polls dented market bets on a victory for Republican Donald Trump.

Democrat Kamala Harris has also gained improving odds on election gambling sites and shows a slight lead on PredictIt, although Polymarket continues to show Trump as the favorite.

The U.S. currency slumped as much as 0.76% against the euro overnight to a three-week trough after a weekend opinion poll revealed Harris with a surprise lead in Iowa, a traditional Republican stronghold. Overall, however, polls continue to suggest a tight race.

Meanwhile, the Australian dollar hovered not far from a nearly three-month low, with the Reserve Bank of Australia widely expected to hold policy steady later in the day. The main focus for traders is expected to be on hints regarding an interest rate cut timing.

Financial markets in recent weeks had leaned strongly toward a win for Trump—whose tariff and immigration policies are perceived as inflationary by analysts—amid a climb in odds on some betting platforms.

The dollar index, measuring the currency against six major peers including the euro, was flat at 103.92 as of 0033 GMT, having slumped as low as 103.67 on Monday for the first time since Oct. 21. Last week, it surged to its highest since the end of July at 104.63.

The euro was little changed at $1.0873, after lifting to $1.09145 in the previous session for the first time since Oct. 15.

Against the yen, the dollar traded at 152.325, following a drop to 151.54 overnight, marking a one-week low.

Carol Kong, a currency strategist at Commonwealth Bank of Australia, stated, "We judge financial markets are now positioned for a Harris win." She mentioned that the USD could modestly fall by 1%-2% this week if Vice President Harris wins, while it could rise materially if former President Trump wins. Delays or disputes over vote counting could add to currency volatility this week.

The winner may not be determined for days after Tuesday's vote, although Trump has already indicated he will contest any defeat, as he did in 2020.

One-week implied volatility options for euro/dollar have risen to their highest since March 2023. Options for the offshore yuan against the greenback hovered near Monday's record high, while those on the dollar-Mexican peso pair were at their highest since April 2020. Analysts speculate China and Mexico would be among the hardest hit by any protectionist Trump policies.

Leading cryptocurrency Bitcoin rose 1.4% to $67,992, after dipping to a one-week low of $66,776.19 overnight. Trump is perceived by analysts as enacting more favorable policies for cryptocurrencies than Harris.

Analysts at TD Securities noted, "While your guess is as good as ours about who will win, we are confident about the scenarios (we) laid out recently: In short, a Trump win or Red wave are bullish for the USD; a Blue Wave will crater the USD. Somewhere in the middle lies a Harris victory."

They also remarked, "We don't think Harris is necessarily bad for the USD over the medium term; Harris simply shifts the focus back to macro, while Trump reshapes the market narrative around politics."

On Thursday, the Federal Reserve is expected to cut rates by 25 basis points. Markets will focus on any clues that the U.S. central bank could skip a cut in December, after last week's monthly jobs report showed fewer jobs were added than economists had anticipated in October, raising questions over the labour market's softness.

In addition, the Bank of England is expected to cut rates by 25 basis points, while the Riksbank is projected to ease by 50 basis points, and the Norges Bank is expected to stay on hold.

In Australia, investors will be sensitive to any changes in the RBA's statement—which is due at 0330 GMT—especially regarding whether policy needs to be "sufficiently restrictive" and not "ruling anything in or out" on rates.

The Australian dollar edged down to $0.6582, remaining close to last week's low of $0.6537, the weakest since Aug. 8.