Dollar hits 16-month high; Brexit fears knock sterling, euro

LONDON (Reuters) – The dollar rose 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 has risen since the Fed kept interest rates steady last week and reaffirmed its monetary tightening stance. It remains underpinned by the robust U.S. economy. Fears about a no-deal Brexit and a growing rift in Europe over Italy’s budget helped the dollar extend its gains on Monday.

“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.”

The euro was knocked back by reports the European Commission has rejected Italy’s 2019 budget, saying it flouted a previous commitment to lower the country’s deficit. The single currency slid 0.7 percent 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.

All of this has been good news for dollar bulls, with the Sino-U.S. trade tensions and weak China data also feeding safe-haven flows to the greenback.

“A strong U.S. economy versus a weakening eurozone economy will trigger further euro-selling pressure while the dollar will be supported going into year end,” said Bernd Berg, Global Macro and FX Strategist at Woodman Asset Management AG.

The British pound on Monday fell 1 percent and slumped to $1.2841 as doubts grew over UK Prime Minister Theresa May’s ability to get the backing of the EU and her own party for any Brexit deal.

With less than five 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.

Four British ministers who back remaining in the European Union are on the verge of quitting May’s government over Brexit, the Sunday Times reported, adding to the political uncertainty.

Against the Japanese yen, the dollar gained 0.3 percent and was last at 114.115, its weakest level since Oct. 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 AUD= lost 0.4 percent on the greenback to $0.7194.