Dollar jumps before Fed statement, turns positive for 2018

NEW YORK (Reuters) - The U.S. dollar surged into positive territory for 2018 on Tuesday and broke past key levels against several currencies as a divergence between growth and the interest rate outlook versus other countries spurred investors to chase the currency higher.

FILE PHOTO: A U.S. Dollar note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration/File Photo

The dollar, traded against a basket of major currencies, rose as high as 92.566, the highest since Jan. 10, before retracing to 92.454. The greenback is approaching this year’s high of 92.64 reached on Jan. 9. and is above the year’s open at 92.24.

“We’re pretty much back to where we were at the beginning of the year, so a lot of the dollar weakness has been pretty much wiped out,” said Sireen Harajli, foreign exchange strategist at Mizuho in New York.

The euro, which has been knocked by weaker-than-expected economic data and growing doubts about when the European Central Bank will normalize its monetary policy, fell 0.67 percent against the greenback to $1.1998 .

The U.S. economy has shown signs of strength in 2018 that few other developed economies can match.

Sterling extended losses on Tuesday to below the $1.37 line for the first time in 3-1/2 months after survey data showed British manufacturing growth sliding to a 17-month low.

Markets do not expect a change in interest rates from the Federal Reserve at the conclusion of its meeting on Wednesday, though analysts will be watching for any change in language and indications that a June hike is likely.

Investors are also focused on Friday’s employment report for April for further indications of the strength of the U.S. economy and inflation pressures.

Data on Tuesday showed that U.S. factory activity slowed for a second straight month in April, weighed down by shortages of skilled workers and rising capacity constraints.

Geopolitical tensions, including around a U.S.-China trade spat, have also subsided in recent weeks to support the dollar.

“There was some concerns about the potential for trade wars and the U.S. administration’s hard line on China. That seems to have eased a little bit and given markets some sense of comfort,” said Harajli.

Traders said relatively illiquid markets because of holidays across much of Europe and parts of Asia had exacerbated moves on Tuesday.

(This version of the story corrects dollar-euro rate in fourth paragraph to $1.1998)

Additional reporting by Tommy Wilkes in London; Editing by Frances Kerry