May 1, 2018 / 12:00 PM / 19 days ago

FOREX-Dollar roars into positive territory for 2018 before Fed meeting

* Dollar index now up for 2018; euro back to January lows

* Swedish crown, sterling slide as dollar breaks key levels

* Reduced market liquidity because of public holidays

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

By Tommy Wilkes

LONDON, May 1 (Reuters) - The U.S. dollar surged on Tuesday into positive territory for 2018 and broke past key levels against several currencies as a divergence between growth and the interest rate outlook versus other countries spurred investors to chase the greenback higher.

Traders said markets that were relatively illiquid due to holidays across much of Europe and parts of Asia had accentuated moves on Tuesday but that dollar bulls, at least in the short-term, were in the ascendancy for a currency that until two weeks ago had struggled.

Investors scrambled to buy dollars ahead of the Federal Reserve’s monetary policy meeting on Wednesday where some expect the central bank to sound more hawkish on interest rates.

The dollar index measured against a basket of major currencies rose half a percent to as much as 92.268, the highest since Jan. 11 and higher than where it started the year.

Against the euro, which has been knocked by weaker-than-expected economic data and growing doubts about when the European Central Bank will normalise its monetary policy, the dollar gained half a percent.

That left the single currency as low as $1.2026 and more than five cents from its February and three-year highs.

The dollar also pushed past key levels against the Australian dollar, Swedish crown, Swiss franc British pound and a clutch of emerging market currencies, where moves were notably large.

“Given the positive sentiment and the lack of liquidity it doesn’t take much for the dollar to move higher,” said Valentin Marinov, Head of G10 FX Strategy at Credit Agricole. “On the whole the dollar will continue to take its cue from the fixed income markets.”

A rise in the U.S. 10-year Treasury yield last week spurred a round of dollar buying, and on Tuesday the yield hovered around 2.9550.

Marinov noted that price action after the Fed gives its monetary policy decision, and crucial U.S. jobs data to be published on Friday, will be a better gauge of investor appetite for more dollar strength.

“The U.S. dollar remains firm as investors cast an eye towards the outcome of the FOMC meeting tomorrow amid speculation the Fed wil lean a little more hawkish in its rate outlook,” Scotiabank analysts said.

U.S. DIVERGENCE

Most analysts have been negative on the U.S. currency this year, predicting that a splurge in government borrowing and a U.S. administration keen on a weaker currency would dent the dollar just as investors flocked back to the euro zone.

Most still believe the dollar will weaken over the medium to longer term, however, with the euro and Japanese yen seen as the main beneficiaries.

But the U.S. economy has shown signs of strength in 2018 that few other developed economies can match. Subsiding geopolitical tensions, including around a U.S.-China trade spat, have provided further dollar support.

“The key U.S. dollar driver has been the divergence between economic data in the U.S. and the rest of the world, and U.S. data continues to look comparatively robust,” Morgan Stanley analysts said in a note.

While markets don’t expect a change in rates from the Fed at the conclusion of its meeting, investors will be watching for any change in language.

Bond markets are expecting roughly three rate hikes until the end of the year and the focus will be on whether the Fed drops any cautionary comments on the inflation outlook.

With the dollar rallying, there were several casualties on Tuesday. The Swedish crown fell more than 1.3 percent to 8.8575 crowns per dollar, a fresh one-year low, and lost 0.9 percent to hit 10.655 crowns versus the euro, its lowest since 2009.

The Swedish currency is one of the worst performing major currencies in 2018 as investors bet the Riksbank will be one of the last central banks to rein in its stimulus.

Sterling also skidded more than half a percent to below $1.37, although most of the move was down to more weaker-than-expected British economic news.

The dollar rose 0.3 percent to 109.70 yen, its highest since Feb 8.

The New Zealand and Australian dollars also dropped against the dollar, the Australian currency to $0.7505, its weakest since Dec. 11.

Editing by Mark Heinrich

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