May 8, 2018 / 3:34 PM / in 2 months

GLOBAL MARKETS-Dollar hits 2018 high amid Iran pact worry; crude slumps

(Adds U.S. market open, byline, dateline; previous LONDON)

* Brent drops ahead of news on U.S. sanctions on Iran

* Italian shares, bonds drop on election uncertainty

By Herbert Lash

NEW YORK, May 8 (Reuters) - The U.S. dollar hit fresh 2018 highs on Tuesday on safe-haven demand amid expectations President Donald Trump will pull out of a key nuclear accord with Iran, while oil prices slumped ahead of news on whether the U.S. will reinstate sanctions on Iran.

U.S. officials indicated late Monday that Trump would withdraw from the deal but it was unclear on what terms and whether sanctions would be announced, said a senior European official closely involved in Iran diplomacy.

Brent crude futures dropped 3.1 percent to $73.82 a barrel, while U.S. West Texas Intermediate (WTI) crude futures were down 3.2 percent at $68.45.

Equity markets in the U.S. and Europe edged lower, weighed by technology and consumer discretionary stocks, as investors awaited Trump's decision at 2:00 p.m. ET (1800 GMT).

A U.S. withdrawal from the multination accord could impact Iranian crude exports and also fan geopolitical tensions in the Middle East, home to one-third of the world's daily oil supply.

The possibility of Trump walking away from the Iran deal has been widely telegraphed, said Jack Ablin, chief investment officer and founding partner at Cresset Wealth Advisors in Chicago.

"A lot of strength in oil has already occurred, this could be just buy-the-rumor sell-the-news with oil," Ablin said. If (Trump) decides to keep the deal and negotiate you could see oil prices fall."

The dollar index, tracking it against a group of six major currencies, has surged about 4.5 percent in three weeks as hopes were dashed that other major central banks would follow the U.S. Federal Reserve in normalizing monetary policy.

The euro and sterling fell under renewed pressure, the former on prospects of early elections in Italy and the latter as hopes waned of a Bank of England rate increase this week.

"The dollar reflects the incremental economic strength of the U.S. versus Europe and other places," Ablin said. "The dollar is somewhat undervalued relative to the euro and the pound but it is very overvalued relative to the Japan yen."

The euro fell 0.55 percent against the dollar to $1.1854 , the lowest since December. Against the yen, the dollar gained 0.11 percent to 109.19 per $1.

The Dow Jones Industrial Average fell 49.96 points, or 0.21 percent, to 24,307.36. The S&P 500 lost 7.53 points, or 0.28 percent, to 2,665.1 and the Nasdaq Composite dropped 18.77 points, or 0.26 percent, to 7,246.45.

MSCI's gauge of global equity markets fell 0.09 percent while the pan-European FTSEurofirst 300 index lost 0.02 percent.

Italian government bond yields jumped, lifting southern European peers, as the possibility of an early election increased with the largest anti-establishment parties polling strongly.

The Italy/Germany 10-year government bond yield spread hit its widest in three weeks at 128 basis points, while Italian 10-year yields shot up to yield 1.863 percent.

Benchmark U.S. Treasury 10-year notes last fell 7/32 in price to yield 2.9779 percent.

Reporting by Herbert Lash; Editing by Bernadette Baum

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