September 5, 2018 / 3:18 PM / 16 days ago

FOREX-Sterling up on Brexit breakthrough hopes, trade worries support dollar

* Pound up on report Germany and Britain to drop key Brexit demand

* Emerging market currency index near its lowest since May 2017 (New throughout, updates rates, comments to U.S. market open; changes dateline; previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, Sept 5 (Reuters) - Sterling rose against the dollar and the euro on Wednesday after Bloomberg reported that the British and German governments had abandoned key Brexit demands, potentially easing the path for Britain to strike a deal with the European Union.

Sterling, which earlier slipped to a more than two-week low of $1.2783 against the dollar, reversed course to trade up 0.8 percent at $1.2957.

The British pound was 0.52 percent higher against the euro.

Bloomberg quoted people familiar with the matter as saying that Germany would be ready to accept a less detailed agreement on Britain's future economic and trade ties with the EU in a bid to get a Brexit deal done.

"It certainly suggests that problem has been put to bed at home, to some extent," said Karl Schamotta, director of FX strategy and structured products at Cambridge Global Payments in Toronto.

"We have had a kind of a washout of the short positions there to some extent," he said.

Speculators' net short position on the British pound stood at 76,928 contracts, the most bearish on sterling since May 2017, Commodity Futures Trading Commission data released on Friday showed.

"We've heard these kinds of rumours lift the pound before and it should be treated with caution," Neil Wilson, chief market analyst at Markets.com, said in a note.

"But nevertheless it does still point to a degree of softening in the general tone of talks and that a deal is more likely than not," said Wilson.

The rally in sterling weighed on the dollar but the greenback remained near multi-week highs against a basket of currencies on Wednesday, as worries about trade tensions kept investors loyal to the safe-haven greenback.

Trump could impose levies on $200 billion more of Chinese imports after a public comment period on the new tariffs ends on Thursday, although it is unclear how quickly that will happen.

Canada heads into talks in Washington on Wednesday to renew NAFTA, determined not to back down on key issues.

The dollar index, which measures the greenback against a basket of six currencies, was down 0.31 percent at 95.146. The index hit a two-week high on Tuesday.

Emerging market currencies remained weak, on fears export-oriented economies would be caught in the crossfire of any escalating trade conflict. The MSCI EM Currency Index was down 0.26 percent, after slipping to its lowest since May 2017 earlier in the session.

"We are looking at a situation in emerging markets where contagion is turning into something that resembles the plague," said Schamotta.

The Canadian dollar was little changed on the day after the Bank of Canada held interest rates steady at 1.50 percent as markets had expected.

Reporting by Saqib Iqbal Ahmed Editing by Susan Thomas

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