* Graphic: World FX rates in 2018 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.

EURO STRUGGLES

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)

Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

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