Dollar hits 2018 highs; U.S. exit from Iran deal caps gain

By Richard Leong

NEW YORK (Reuters) - The U.S. dollar rose to its highest level this year against a basket of currencies on Tuesday due to worries about political turmoil in Italy before paring some gains on a U.S. decision to withdraw from the international nuclear deal with Iran.

The dollar's run-up stalled ahead of President Donald Trump's announcement that the United States was pulling out of the 2015 deal, which eased economic sanctions in exchange for Tehran limiting its nuclear program. Trump said he would reimpose the sanctions.

Commodity-linked and emerging market currencies fell on worries that a possible U.S. withdrawal would hit risk appetite in financial markets, holding their losses after Trump's announcement.

Traders, however, downplayed the market significance of the move.

"This was probably going to happen. Overall it doesn’t change the story on dollar strength with the Fed rate hikes and a hiccup in Europe," said John Doyle, vice president of dealing and trading at Tempus in Washington.

The index that tracks the greenback versus the euro, yen, sterling and six other currencies <.DXY> earlier on Tuesday hit 93.280, its highest level since December. It was last up 0.4 percent at 93.100 in late U.S. trading.

The euro declined 0.5 percent to $1.1860 after hitting $1.1836 earlier, its weakest level since late December, Reuters data showed.

The single currency fell over 0.5 percent to 129.32 yen.

On Monday, Italy's two largest parties resisted President Sergio Mattarella's call to rally behind a "neutral government."

The yen firmed against the dollar at 109.06 yen as some traders favored the currency of the world's largest saver in the wake of Trump's Iran announcement.

The Swiss franc, another traditional safe-haven currency, was steady against the dollar at 1.0019 franc, and was 0.6 percent stronger at 1.1883 franc .

Expectations for more U.S. interest rate hikes from the Federal Reserve have underpinned the dollar's rebound despite soft U.S. domestic data, analysts said.

Thursday's U.S. consumer price index for April should show whether inflation is approaching the Fed's 2 percent goal.

"We have to wait for the inflation data which would be telling for the dollar," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

The pound declined to $1.3541 , its lowest level since Jan. 11. Bank of England policymakers are expected to leave interest rates unchanged when they meet on Thursday.

Among commodity-linked currencies, the Australian dollar fell 0.9 percent to $0.74485 after touching an 11-month low.

(Additional reporting by Saikat Chatterjee and Sujata Rao in LONDON; Editing by David Gregorio and Paul Simao)

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