FOREX-Dollar trims gains as U.S. election race enters home stretch

* Graphic: World FX rates in 2020 (Updates throughout)

LONDON, Nov 4 (Reuters) - The dollar gave up some gains and riskier currencies remained on the backfoot as markets waited for the U.S. election outcome after early results indicated a tight race, surprising investors who had bet on a decisive win for Democrat Joe Biden.

President Donald Trump won in the key battleground states of Florida, Ohio and Texas, dashing market hopes for a clear result. Investors waited to see whether Trump would retain the Rust Belt states -- Michigan, Wisconsin and Pennsylvania -- that sent him to the White House in 2016.

The dollar rose as much as 1.2% overnight to hit more than one-month highs versus its rivals and riskier currencies such as the yuan and Australian dollar fell more than 1% each.

But the dollar gave back some of its gains to trade up 0.7% as the race tightened.

“The expected ‘blue sweep’ that the market was anticipating has not materialised,” said Neil Jones, head of FX sales for financial institutions at Mizuho.

A Biden victory had been expected to boost prospects for a large U.S. fiscal aid package and lessen trade war tensions, causing the dollar to weaken sharply. It fell to a one-week low on Tuesday on expectations of a Biden win.

But an uncertain election result heightens the risk of a contested outcome, which could include lengthy legal battles, prompting investors to seek safer assets.

John Goldie, an FX dealer at Argentex, said that the uncertainty about the result left markets in wait-and-see mode.

“Talking to clients, we had some expectations of some bigger moves in either direction,” he said.

The rising likelihood of a Trump re-election hurt currencies that have been hardest hit by his trade policies, such as the Mexican peso and the yuan, which were down 2.2% and 0.7% on the day, respectively .

The Australian dollar also took a hit, down 1.2% at 0.7077 . Sterling fell around 1%.

The euro was down 0.4% at $1.1671 after having earlier tumbled to its lowest in more than three months.

(For multimedia U.S. election coverage, click here here.)

“We saw the dollar come under pressure going into the election and we are now seeing an unwind of that,” said Salman Ahmed, head of macro and strategic allocation at Fidelity International.

Overnight volatility gauges for euro-dollar and dollar-yen fell however. They had surged to their highest levels since March earlier this week .

Market participants said that this was due to a lack of information, with investors not initiating new trades at this stage.

Reporting by Elizabeth Howcroft; additional reporting by Sujata Rao and Tom Westbrook in SINGAPORE; Editing by Saikat Chatterjee and Emelia Sithole-Matarise