Dollar weaker as soft-Brexit hopes boost pound, euro

NEW YORK (Reuters) - The dollar retreated modestly against a basket of major currencies on Wednesday as sterling and the euro rose following a Bloomberg report that the German and British governments had abandoned key Brexit demands, potentially easing the path for a divorce deal.

General weakness among emerging market currencies, however, supported the dollar.

The dollar index <.DXY>, which measures the greenback against a basket of six currencies, was down 0.3 percent at 95.154.

The index surrendered early gains on the day as sterling soared after Bloomberg quoted people familiar with the matter as saying that Germany would be ready to accept a less detailed agreement on the U.K.'s future economic and trade ties with the EU in a bid to get a Brexit deal done.

The British pound gave up some of the gains after Germany appeared to shoot down the report and said it is preparing for all Brexit scenarios, including a no-deal.

Sterling was up 0.4 percent at $1.2905 against the dollar, while the euro was 0.39 percent higher against the greenback at $1.1626.

"We have had a kind of a washout of the short positions there to some extent," said Karl Schamotta, director of FX strategy and structured products at Cambridge Global Payments in Toronto.

Speculators' net short position on the British pound stood at 76,928 contracts, the most bearish on sterling since May 2017, Commodity Futures Trading Commission data released on Friday showed.

"We've heard these kinds of rumors lift the pound before and it should be treated with caution," Neil Wilson, chief market analyst at Markets.com, said in a note.

"But nevertheless it does still point to a degree of softening in the general tone of talks and that a deal is more likely than not," said Wilson.

The greenback remained near multi-week highs against a basket of currencies on Wednesday, as worries about trade tensions kept investors loyal to the safe-haven greenback.

Trump could impose levies on $200 billion more of Chinese imports after a public comment period on the new tariffs ends on Thursday, although it is unclear how quickly that will happen.

Meanwhile, Canada insisted there was still room to salvage the North American Free Trade Agreement after talks on Wednesday with the United States.

Emerging market currencies remained weak, on fears export-oriented economies would be caught in the crossfire of any escalating trade conflict. The MSCI EM Currency Index <.MIEM00000CUS> was down 0.16 percent, after slipping to its lowest since May 2017 earlier in the session.

"We are looking at a situation in emerging markets where contagion is turning into something that resembles the plague," said Schamotta.

(Reporting by Saqib Iqbal Ahmed; Editing by Susan Thomas and Chizu Nomiyama)

By Saqib Iqbal Ahmed