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'King dollar' benefits from European risks, growth fears

Reuters, London
The dollar surged to nearly 17-month highs on Monday against a basket of major currencies as investors sought out the liquid and high-yielding currency against a backdrop of global growth worry and rising political risk in Italy and Britain.
A 2-percent oil price jump initially supported European equities but the gains fizzled rapidly as fears grew for Italian lender Carige whose shares were suspended after reports of a capital hole.
While Shanghai was lifted one percent by regulators' promise to simplify share buybacks, MSCI's world equity index was down 0.3 percent and Asian markets broadly weakened following Friday's weak Wall Street close.
Investors fretted about signs of slowing growth in China where e-commerce giant Alibaba was the latest to raise alarm bells, with the slowest ever annual sales growth during its Singles Day shopping event.
Many also reckon that U.S. President Donald Trump could turn up the heat over trade, further damaging China's economy.
All that, coupled with European political risks, conspired to push the dollar 0.6 percent higher against a
basket of currencies. Sterling fell 1 percent while the euro, which comprises more than 50 percent of the dollar index, fell 0.7 percent to its lowest since July 2017.
"King dollar has staged a return," Valentin Marinov, head of G10 FX strategy at Credit Agricole, said, adding that investors had piled back into the dollar after last week's U.S. Federal Reserve meeting confirmed a ratetighteningpath.
"Euro and pound are both hurt by political risk and that is aggravating underperformance versus the dollar," Marinov said.
In Britain, Prime Minister Theresa May was forced to abandon plans for an emergency cabinet meeting to approve a Brexit agreement, the Independent news website reported, stoking fears that the government might not be able to secure a deal that satisfied both the European Union and members of the ruling party.
The opposition Labour Party said that if May's Brexit deal was voted down in parliament, it would push for a national election and possibly also another referendum.
Latest futures data showed net short sterling positions registered their biggestweekly risein l-l/2months
Deutsche Bank analysts, however, predicted more pain, telling clients: “not enough risk is priced into sterling given the parliamentary problems ahead".
For the euro, Italy was the main focus, with Rome facing a Tuesday deadline to submit a revised budget to the EU, though it has so far refused to cut the draft budget deficit, setting the stage for a collision with Brussels.
Markets were also spooked by reports that Banca Carige would need around 400 million euros ($451 million) to plug a hole in its capital base and Italy's deposit protection fund could fill only part of it.
That raises the specter of a banking crisis in the euro zone's third-biggest economy, keeping Italy's bond yield spread over Germany - the risk premium attached to Italian assets - around the psychologically key 300 basis-point mark. Italian bankshares fell 0.6 percent
Bernd Berg, global macro strategist at Woodman Asset Management, predicted the euro would tumble below $1.10 from the current $1,126 "as renewed eurozone and Brexit angst and a diverging economic outlook with a strong U.S. economy versus a weakening eurozone economy will trigger further euro selling pressure."