May 1, 2018 / 10:04 AM / in a year

REFILE-FOREX-Dollar turns positive for 2018 ahead of Fed meeting

(Refiles to remove extra word from headline)

* Dollar index up in 2018; euro back to Jan lows

* Market liquidity lower because of public holidays

* Swedish crown, pound, fall heavily

* Graphic: World FX rates in 2018

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 currency higher.

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

The dollar, traded against a basket of major currencies, rose 0.4 percent to 92.221, 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 0.4 percent.

That left the single currency at $1.2029 and more than five cents from its February highs.

The dollar also pushed past key levels against the Australian dollar, the Swedish crown, Swiss franc and the British pound.

“It seems that the dollar is still in demand. 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.

Marinov noted that price action later in the week when the Federal Reserve gives its monetary policy decision and crucial U.S. jobs data is published will be a better gauge of whether investors are prepared to push the dollar much higher.

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

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

But the U.S. economy has shown signs of strength in 2018 few other developed economies can match while geopolitical tensions, including around a U.S.-China trade spat, have subsided in recent weeks to support the greenback.

“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 said.

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

BNY Mellon strategists said that if the Fed drops any cautionary comments on its inflationary outlook, then it would signal a growing confidence among policymakers that inflation has firmed up enough for an increase in forecasts.

Bond markets are expecting roughly three rate hikes until the end of the year.

Markets are also focused on Friday’s April U.S. non-farm payrolls report, which could provide further signs of strength.

With the dollar rallying, there were several casualties on Tuesday. The Swedish crown fell more than one percent to 8.8335, its lowest since May last year.

The crown 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, although most of the move was down to more weaker-than-expected economic news.

The dollar rose 0.2 percent to 109.575 yen, its highest since early February.

The New Zealand and Australian dollars also fell, the latter to $0.7507 and its weakest since Dec. 11.

Additional reporting by Shinichi Saoshiro in TOKYO, Editing by Andrew Heavens, William Maclean

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