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Widening cracks in euro sends US dollar to 2018 highs

London

THE US dollar surged to a 2018 high against its rivals on Tuesday as a rout of the euro prompted traders to buy the greenback despite some concerns its rally may have been too quick.

Against a basket of rivals, the US dollar has surged about 4.5 per cent in three weeks as expectations that other major central banks would follow the US Federal Reserve in normalising monetary policy have been disappointed. The latest leg in the US dollar's run higher came as sterling and the euro came under renewed pressure, the former from waning expectations of a Bank of England rate increase this week and the latter from prospects of early elections in Italy.

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. That pushed the euro down by half a per cent to US$1.18620, its lowest levels since late December. It is already one per cent lower since the start of the year, a big reversal from 2017 when it notched up double-digit gains against the US dollar.

On Tuesday, the US dollar extended recent gains and rose 0.4 per cent to 93.13 against the basket - in which the euro holds the biggest weight - as markets further cut short bets against it built up in recent months.

Some of the US dollar's biggest gains on Tuesday came against the euro and the Australian dollar which declined by 0.4 per cent and 0.8 per cent 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 per cent.

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 the US 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 said.

But despite the US dollar's rally, the Japanese yen was still holding its own against the greenback and other majors indicating that underlying caution remained as investors focused their attention on US President Donald Trump's decision about the future of an international nuclear agreement with Iran. REUTERS

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