March 19, 2018 / 12:41 PM / a year ago

FOREX-Dollar consolidates gains before Fed meets; sterling jumps

* Sterling jumps as EU-Britain reach transition agreement

* Undertone of risk aversion in backdrop of G20 meeting

* Graphic: World FX rates in 2018

By Saikat Chatterjee

LONDON, March 19 (Reuters) - The dollar was little changed on Monday after four straight weeks of gains as financial markets looked for the first rate increase of the year from the U.S. Federal Reserve.

Markets will be focused on whether Fed policy makers forecast four rate increases this year in their “dot plot” projections, instead of the three they projected in December.

Bond markets have already priced in one rate hike this week. Yields, especially on the short end of the bond yield curve, have risen more than 30 basis points this year, anticipating a more confident sounding Fed.

“By itself, a rate hike is not sufficient to lift the dollar considerably from current levels and we would have to see a shift in the Fed’s `dot plot’ projections or hawkish talk despite the recent rise in bond yields,” said Ulrich Leuchtmann, head of FX strategy at Commerzbank.

The dollar index was broadly flat against a basket of six major peers at 90.224. On Friday, the index reached a two-week high near 90.38 after data showed a February gain in U.S. industrial production.

Some bank models show investors have already begun unwinding short positions on the dollar, though futures data reflect a more cautious stance.

Morgan Stanley strategists said the gap between short-term U.S. interbank lending rates and overnight money market rates - now hitting 54 basis points - was evidence of quarter-end liquidity pressures.

“There is a undertone of risk-off sentiment that is supporting the dollar,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.

But investors warned against reading too much into the dollar bounce. The U.S. currency was expected to repeat the pattern of the past year by weakening in the aftermath of the rate hikes, according to strategists at BNP Paribas.

Traders are also nervous after weekend polls suggested a drop in public support for Prime Minister Shinzo Abe over his handling of a cronyism scandal. Doubts are growing about his ability to press forward with his reflationary economic agenda.

Speaking in parliament on Monday, Abe took responsibility for a loss of trust in his government, but denied he or his wife had intervened in a land sale to a school operator with ties to his wife.

The euro eased 0.1 percent against the dollar at$1.22755.

Sterling was the biggest gainer in currency markets as Britain and the European Union appeared to reach-broad agreement on a post-Brexit transition period and the Irish border.

Sterling pushed to its highest level against the euro since Feb. 8, rising as much as 0.7 percent to 87.50 pence per euro and jumped 0.8 percent against the dollar at $1.4063 on relief over the agreement. (Reporting by Saikat Chatterjee, additional reporting by Tommy Wilkes, editing by Larry King)

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