November 13, 2018 / 4:50 AM / a month ago

FOREX-Dollar hovers near 16-month high, yen pares intraday gains

* Yen weakens from intraday high to trade near 114/dollar

* Euro, sterling stage mild relief rally post Monday's steep fall

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Vatsal Srivastava

SINGAPORE, Nov 13 (Reuters) - The dollar traded slightly below a 16-month high versus a basket of peers on Tuesday, benefiting from save-haven flows sparked by political uncertainties in Europe and fears of a global economic slowdown.

Investor confidence has been eroded by bitter trade tensions between the United States and China, fears of a no-deal Brexit, and a standoff between Rome and the European Union over Italy's deficit-deepening budget.

Added to that litany is a view that corporate earnings growth has peaked amid rising borrowing costs.

Shares on Wall Street tumbled on Monday, with falls led by technology stocks.

The bearish mood crept into Asian trade as well with the MSCI ex-Japan index falling 0.87 percent to trade at 477.5 on Tuesday.

The U.S. Federal Reserve is set to raise rates by 25 basis points in December, with two more hikes to follow by mid-2019, as wage pressures build in a booming economy..

The CME group's FedWatch tool puts the probability of a December rate hike at 75 percent.

The dollar index, a gauge of its value versus six major peers, traded at 97.5, sitting shy of its 16-month high of 97.69 hit on Monday.

"The dollar has broken out of a 17-month range on the back of safe-haven buying, led by falling equity prices as well as the heavy sell-offs in the euro and sterling," said Nick Twidale, chief operating officer at Rakuten Securities.

The Japanese yen traded at 113.99 on Tuesday, as the greenback gained 0.1 percent versus the yen. The yen touched a six-week low of 114.20 on Monday.

The dollar has been preferred over the yen due to the diverging monetary policies of the Fed and the Bank of Japan, which is expected to retain its ultra-loose monetary policy settings for some time in the face stubbornly sluggish inflation.

But analysts believe that the yen will strengthen if global risk sentiment worsens, thanks to its safe-haven status.

"The yen will now have a greater safe haven pull than the dollar if equities witness a further correction. We see dollar/yen downside in that scenario," added Twidale.

Sterling staged a mild relief rally in Asian to trade at $1.2879, gaining 0.28 percent. It has slipped against the dollar in the last three trading sessions and posted its largest percentage decline versus the dollar since Sept. 21 on Monday.

"Sterling was a bit oversold and much of last night's move occurred in thin liquidity. The lack of follow-through in Asia has led some to take profits on their shorts," said Stephen Innes, head of trading, APAC at Oanda.

Investor sentiment has weakened as doubts grow over Prime Minister Theresa May's ability to win the backing of the European Union or her own party for a 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.

However, sterling traders got some encouragement after the European Union's chief Brexit negotiator said the main elements of an exit treaty text were ready to present to the British cabinet on Tuesday.

The euro gained 0.2 percent to trade at $1.1243 on Tuesday, after tumbling more than one percent versus the dollar on Monday.

The standoff between Rome and Brussels over Italy's free-spending budget and wide fiscal deficit has put immense strain on the single currency, which has lost 5.9 percent of its value over the last six months.

The European Commission rejected Italy's 2019 budget last month, saying it flouted a previous commitment to lower the country's deficit.

Italy is expected to submit a revised version of its budget on Tuesday, keeping euro traders active.

Reporting by Vatsal Srivastava, editing by Eric Meijer

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