* Dollar index jumps to fresh 16-month high
* Euro and sterling tumble on Brexit woes
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Vatsal Srivastava
SINGAPORE, Nov 12 (Reuters) - The dollar rose to a fresh 16-month high versus its key rivals on Monday as traders punished the euro and sterling on growing uncertainty over a smooth Brexit deal.
The U.S. currency has also been supported by the Federal Reserve, which last week reaffirmed its plan to raise interest rates next month and remained on track for two more potential rate hikes by mid-2019 thanks to an upbeat economy.
The dollar index, a gauge of its value against six major peers, added more than 0.5 percent to 97.42, levels visited in June 2017. It has strengthened four weeks in a row, having gained 0.4 percent last week.
“The dollar index was firm all last week, bouncing back after the (U.S.) mid-term election results. Looking ahead, moves will be driven by the developments around the Italian budget and Brexit politics,” said Sim Moh Siong, currency strategist at Bank of Singapore.
The greenback extended morning gains as sellers targeted the euro and sterling, which together constitute around 70 percent of the dollar index weight.
The British pound lost 0.9 percent to $1.2856 amid increasing tensions within British Prime Minister Theresa May’s government over whether she can negotiate an orderly Brexit plan with Brussels.
With less than five months before Britain is due to leave the European Union on March 29, negotiations are still stuck over how to prevent a return to a hard border between British-ruled Northern Ireland and EU member Ireland.
Four British ministers who back remaining in the European Union are on the verge of quitting May’s government over Brexit, the Sunday Times reported, adding to the political uncertainty.
“Eventually, the EU and May will come to a deal. Both parties want to conclude the deal, but the only risk is whether May will still be prime minister. I expect sterling to remain choppy in its recent wide range,” Bank of Singapore’s Sim said.
The Brexit woes also hit the euro, which slumped 0.7 percent to $1.1257, its weakest level since June, 2017, and extending losses for the fourth session.
Adding to the pressure on the single currency is the standoff between Rome and Brussels over Italy’s free spending budget and wide fiscal deficit. The European Commission rejected Italy’s 2019 budget last month, saying it flouted a previous commitment to lower the country’s deficit.
The EU, which has given Rome until Tuesday to present a revised version of the budget, also cut its forecasts for Italian growth last week.
All of this has been good news for dollar bulls, with the Sino-U.S. trade tensions and weak China data also feeding safe-haven flows to the greenback.
Against the Japanese yen, the dollar gained 0.3 percent and was last at 114.18, its weakest level since Oct. 4. The dollar has been preferred over the yen because of the diverging monetary policies of the Fed and the Bank of Japan, which is expected to retain its ultra-loose monetary policy settings for some time in the face stubbornly sluggish inflation.
The Australian dollar lost 0.4 percent on the greenback to $0.7194. (Reporting by Vatsal Srivastava; Editing by Kim Coghill & Shri Navaratnam)