* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Nov 5 (Reuters) - The dollar paused after three consecutive weeks of gains as investors took profits before U.S. midterm elections this week that may fuel a bout of volatility for global markets, with the British pound leading gains on Brexit deal breakthrough hopes.
Notwithstanding a dollar selloff in the second half of last week, hedge funds added to their dollar holdings taking net long positions to its biggest levels since Dec. 2016 as latest data have encouraged more bullish bets.
But market analysts warn that an unexpected outcome at the midterm elections could trigger a massive unwind of long dollar positions and undermine the greenback which has rallied more than 7 percent from April lows against its rivals.
Tuesday’s U.S. congressional election is widely expected to help the Democratic Party, who have a strong chance of winning control of the U.S. House of Representatives, with Republicans likely to keep the Senate.
“On the contrary, if the Republicans put up a strong showing, that could give President Trump a freer hand and he could step up his criticism of the Fed which may hurt the dollar,” said Ricardo Evangelista, a senior analyst at ActivTrades Plc in London.
The dollar index was down 0.1 percent at 96.39. It hit a June 2017 high of 97.20 last week.
Speculators added to their net long U.S. dollar bets, taking the value of the net long dollar position to $26.74 billion in the week ended Oct. 30, nearing its highest level since Dec. 2016, according to latest futures data.
Friday’s data showed that U.S. jobs growth rebounded sharply in October and wages recorded their largest annual gain in 9-1/2 years, pushing U.S. Treasury yields on ten-year maturities to 3.2 percent on Monday.
Broader moves in the currency markets were muted with only the British pound the big gainer as expectations grew that Britain and the European Union are inching closer to a deal.
The currency was lifted by a report over the weekend that said an all-UK customs deal will be written into the legally binding agreement governing Britain’s withdrawal from the European Union.
The strong U.S. data also brought into prominence the diverging trends between a robust U.S. economy and its struggling European counterpart with a Citibank economic monitor showing the European index near 2018 lows.
Recent dovish comments from senior policymakers such as Finnish central bank chief Olli Rehn have raised some hopes that the European Central Bank could extend a new set of long-term loans to the bank sector.
Though ECB policymakers said last week that new targeted long-term refinancing operations are an option that may be considered in due time, sources have told Reuters that a new round of loans is not imminent.
The single currency softened 0.1 percent to $1.1378.
“The latest news heightens the downside risk to the euro from weaker economic data for a while,” said John Marley at FX risk management specialist, Smart Currency Business.
Latest headlines from Italy were hardly conciliatory as eurozone finance ministers to meet later in the day with discussion of Italy’s budget high on their agenda.
In an interview with the Financial Times, Italy’s Deputy Prime Minister Luigi Di Maio said the country’s budget deficit expansion could be a model for the rest of the EU to match U.S. fiscal stimuli and encourage investment growth.
Ulrich Leuchtmann, an FX strategist at Commerzbank said the latest comments from Italy suggest the government is not going to give in to the conflict with Brussels.
“There is a high risk of this conflict escalating,” he said.
Reporting by Saikat Chatterjee Editing by Matthew Mpoke Bigg