Dollar hits 16-month high on hawkish Fed

london - Concern about political risks in Europe put pressure on euro and pound

The dollar rallied to a 16-month high on Monday as investors positioned for a Federal Reserve interest rate rise next month and concern about political risks in Europe put pressure on the euro and the pound.

The dollar fell last week on the belief that losses for US President Donald Trump's Republican party in the midterm elections would make further fiscal stimulus measures unlikely.

But the greenback has mounted a significant rally since the Fed kept interest rates steady on Thursday and reaffirmed its monetary tightening stance. The currency remains underpinned by the robust US economy.

Fears about a no-deal Brexit and a growing rift in Europe over Italy's budget have also aided the dollar.

"King dollar has staged a return," said Valentin Marinov, head of G10 FX strategy at Credit Agricole. "After the Fed [last week], investors are pretty happy to reload on long dollar positions. The European currencies look most vulnerable."

Net long positions on the dollar versus G10 currencies last week rose to their highest levels since 2015 at $30.4 billion, according to CFTC data.

The euro was knocked back by concerns about Rome's tussle with the European Commission over its 2019 budget and weakness in Italy's banking sector. The single currency slid 0.7 per cent versus the dollar to its lowest since June 2017 at $1.124.

The European Union, which has given Rome until Tuesday to present a revised version of the budget, also cut its forecasts for Italian growth last week.

The malaise in Europe has been good news for dollar bulls, with the Sino-US trade tensions and weak China data also feeding safe-haven flows to the greenback.

"A strong US economy versus a weakening Eurozone economy will trigger further euro-selling pressure. The dollar will be supported going into year end," said Bernd Berg, global macro and FX strategist at Woodman Asset Management.

The British pound on Monday fell more than 1 per cent to $1.2827 as doubts grew over Prime Minister Theresa May's ability to get the backing of the EU and her own party for any Brexit deal.

With less than 5 months before Britain is due to leave the EU on March 29, negotiations are still stuck over how to prevent a return to a hard border between British-ruled Northern Ireland and EU member Ireland.

Against the Japanese yen, the dollar gained 0.3 per cent and was last at 114.115, its weakest level since October 4. The dollar has been preferred over the yen because of the diverging monetary policies of the Fed and the Bank of Japan, which is expected to keep retain its monetary policy ultra-loose for some time.

The Australian dollar lost 0.4 per cent on the greenback to $0.7194. - Reuters