May 8, 2018 / 10:00 AM / 3 months ago

FOREX-Dollar scales 2018 highs as rally gathers momentum

* Trump announcement on Iran nuclear deal key event risk

* Australian dollar, Canadian dollar lead losers

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, May 8 (Reuters) - The dollar surged to a 2018 high against its rivals on Tuesday as a deepening rout in the euro prompted traders to buy the greenback despite some concerns its rally may have been too quick.

Against a basket of rivals, the dollar has surged about 4.5 percent in three weeks as expectations that other major central banks would follow the footsteps of the U.S. Federal Reserve in normalising monetary policy have been dashed.

The latest leg in the dollar’s run higher came as sterling and the euro came under renewed pressure, the former from waning expectations of a rate increase from the Bank of England this week and the latter from prospects of early elections in Italy.

“The big risks from the sovereign bond markets in the world is about the growing Italian election concerns and the markets love nothing more than a good momentum story,” said Neil Melllor, a senior FX strategist at BNY Mellon in London.

President Sergio Mattarella called on Monday for Italy’s bickering parties to rally behind a neutral government. Italy’s two largest parties, the far-right League and anti-establishment 5-Star Movement, came out against the proposal.

On Tuesday, the dollar extended recent gains and rose 0.4 percent to 93.08 as markets further unwound short bets against the greenback built up in recent months, pushing the dollar up for three consecutive weeks.

Some of the dollar’s biggest gains on Tuesday came against the euro and the Australian dollar which declined by 0.4 percent and 0.8 percent respectively.

The sell-off in these currency pairs rippled through the foreign exchange markets and prompted investors to unwind some of the best performing trades this year.

They include buying the Norwegian currency against the Swedish crown, which on Tuesday fell half a percent.

Short dollar positions saw a further squeeze with latest positioning data keeping the greenback well supported.

On a two-weekly basis, short dollar bets saw the biggest position unwind in six months.

“For the time being there is no possibility of avoiding U.S. dollar, which is also due to the fact that the likelihood of an imminent monetary policy normalisation in other parts of the world is falling,” Commerzbank analysts wrote in a note.

But despite the dollar’s rally, the Japanese yen was still holding its own against the greenback and other majors indicating that underlying caution remained.

Reporting by Saikat Chatterjee; Additional reporting by Sujata Rao; Editing by Angus MacSwan

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