* Hedge funds chase eighth rate hike from the Fed this week
* Pound bounces after Friday’s 1.7 percent drop
* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Sept 24 (Reuters) - The dollar slipped on Monday, erasing its earlier gains, as investors searched for fresh clues to extend a multi-month rally in the greenback before a widely expected interest rate hike by the U.S. central bank this week.
With market forecasts for further interest rate hikes by the U.S. Federal Reserve in line with policymakers’ thinking at roughly three more rate hikes after a quarter-point increase this week, analysts said only unexpectedly strong data would change those bets.
“The dollar rally needs fresh legs and that will have to come from either a big change in rate hike expectations or upside surprises in inflation and wage data,” said Lee Hardman, a currency strategist at MUFG in London.
Earlier the dollar snapped a two-week losing streak as the weekend brought trade tensions back into the spotlight after Beijing released a white paper on the trade dispute saying it would seek a reasonable outcome, while also describing U.S. tactics as “bullying”.
The greenback eased 0.2 percent to 94.07 against a basket of its rivals after being up as much as 0.1 percent earlier.
Moreover, with the Fed set to raise interest rates for the eighth time since late 2015, speculators had ramped up bets that interest rate differentials between the United States and other major economies, particularly Europe, will stretch wider.
“We typically see this brief window before a U.S. rate meeting when hedge funds buy the dollar, and the trade war headlines are also aggravating that trend,” said Viraj Patel, an FX strategist at ING in London.
Latest positioning data showed net speculative long positions on the greenback increasing by their biggest daily rise in more than two months.
For example, net long positions for the dollar have swelled to $25 billion according to CFTC data.
The euro rose 0.2 percent to $1.1772 on some relief that German Chancellor Angela Merkel’s coalition government resolved a dispute over the country’s scandal-tainted spy chief on Sunday, ending a threat to the six-month-old administration.
The pound was the biggest gainer against the dollar, rising 0.7 percent to $1.3136 line after British Brexit Secretary Dominic Raab said on Monday he was confident London would eventually clinch a Brexit deal with the European Union.
Still, investors remained bearish on the British currency with overall short positions rising to a 4-1/2 month high of $6.5 billion, according to latest CFTC data.
Volumes were relatively thin with many Asian centres closed including Japan, China and South Korea. (Reporting by Saikat Chatterjee; Additional reporting by Wayne Cole in SYDNEY; Editing by Alison Williams)