November 5, 2018 / 3:34 PM / 10 days ago

FOREX-Dollar softens ahead of midterm elections, euro up

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Recasts, changes dateline from LONDON, updates rates, adds analyst quote)

By Kate Duguid

LONDON, Nov 5 (Reuters) - The dollar paused after three consecutive weeks of gains as investors took profits before U.S. midterm elections this week that may fuel a bout of volatility for global markets, with the British pound leading gains on Brexit deal breakthrough hopes.

Notwithstanding a dollar selloff in the second half of last week, hedge funds added to their dollar holdings, taking net long positions to the biggest levels since Dec. 2016 as latest data encouraged more bullish bets.

But market analysts warn that an unexpected outcome at the midterm elections could trigger a massive unwind of long dollar positions and undermine the greenback which has rallied more than 7 percent from April lows against its rivals.

Tuesday’s U.S. congressional election is widely expected to help the Democratic Party, who have a strong chance of winning control of the U.S. House of Representatives, with Republicans likely to keep the Senate.

“Much of Trump’s pro-growth, pro-markets agenda has arguably been enacted in the first two years of his presidency while he’s had the backing of both the House and Senate,” Craig Erlam, senior market analyst at Oanda, said.

“If the Democrats take control of the House, for example, it may inhibit his final two years which investors may not be particularly upset about given his determination to engage in a trade war with China and the EU,” he said.

The dollar index was down about 7 basis points on the day at 96.368. It hit a June 2017 high of 97.20 last week.

Speculators added to their net long U.S. dollar bets, taking the value of the net long dollar position to $26.74 billion in the week ended Oct. 30, nearing its highest level since Dec. 2016, according to latest futures data.

The euro was up 10.5 basis points at $1.401, helped by the softer dollar rather than Europe’s economic fundamentals.

Strong U.S. jobs data released last week brought into focus the diverging trends between a robust U.S. economy and its struggling European counterpart with a Citibank economic monitor showing the European index near 2018 lows.

Broader moves in the currency markets were muted with the British pound up as expectations grew that Britain and the European Union are inching closer to a Brexit deal. The pound was last up 2.3 basis points at $1.302.

The currency was lifted by a report in Britain’s Sunday Times that an all-UK customs deal will be written into the legally binding agreement governing the country’s withdrawal from the European Union.

Reporting by Kate Duguid and Saikat Chatterjee Editing by Susan Thomas

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