Dollar index retreats from 16-month peak Sterling hits 6-1/2...

• Dollar index retreats from 16-month peak
• Sterling hits 6-1/2 peak versus euro on hopes for Brexit deal
• Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

(Updates market action, changes dateline, previous LONDON)

The euro and sterling rose on Tuesday following comments from a British official that signaled Britain and the European Union are close to clinching an agreement for the nation to leave the economic bloc as negotiators seek to avoid missing a deadline.

A stronger euro and sterling spurred profit-taking in the dollar, which reached a 16-month peak against a basket of currencies on Monday.

Uncertainty over the terms of Brexit has bogged down both currencies as a deal is required to keep business open between the EU and the world's fifth-biggest economy.

The euro's gain was limited by concerns about Italy's budget proposals and downbeat German investor sentiment data, traders said.

"News that the EU and U.K. nearly have a Brexit deal in place is injecting short-term flows into the common currency," said Viash Sreemuntoo, corporate trader at XE in Toronto.

Encouraging comments on Brexit negotiations lifted the pound to a 6-1/2 month peak versus the euro. Sterling reversed much of Monday's loss against the dollar.

"We are almost within touching distance now," British Cabinet Office Minister David Lidington, who is Prime Minister Theresa May's de facto deputy, told BBC radio.

At 10:49 a.m. (1549 GMT), the euro was up 0.52 percent at $1.12770. It had fallen to $1.1216, the lowest since June 2017.

The common currency was down 0.29 percent at 87.05 pence after touching 86.82 pence earlier Tuesday, which was the lowest since April 26.

Sterling was up 0.89 percent at $1.2964 following a nearly 1 percent drop on Monday.

An index that tracks the dollar versus the euro, sterling, yen and three other currencies .DXY was 0.28 percent lower at 97.269, easing below a 16-month high of 97.693 reached on Monday.

In contrast to the latest news on Brexit, Italy's budget proposals remain a drag on the euro.

Tuesday is the deadline for Italy, the euro zone's third- biggest economy, to resubmit its budget plans to the EU after a showdown between Rome and Brussels over the government's 2019 spending plans.

The European Commission rejected Italy's draft fiscal plan last month and has threatened to impose penalties if it is not revised to conform with EU regulations - something Rome has indicated it is unwilling to do.

The International Monetary Fund on Tuesday warned the government's stimulus plan would leave Italy vulnerable.

The tension between Rome and Brussels has raised fears about Italy's membership in the euro zone.

"Italy is the big test case for the euro," said Joachim Fels, global economic advisor at PIMCO at the Reuters Global Investment Outlook Summit in New York. "That risk is not going away anytime soon."

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	Currency bid prices at 10:49AM (1549 GMT) 

 Description	  RIC		 Last		   U.S. Close  Pct Change	 YTD Pct	 High Bid	Low Bid 
											  Previous				   Change				  
											  Session											
 Euro/Dollar	  EUR=		$1.1277		$1.1217	 +0.53%		 -5.99%	  +1.1281	 +1.1217 
 Dollar/Yen	   JPY=		113.8400	   113.8300	+0.01%		 +1.04%	  +114.1400   +113.5900 
 Euro/Yen		 EURJPY=	 128.39		 127.69	  +0.55%		 -5.02%	  +128.5000   +127.5000 
 Dollar/Swiss	 CHF=		1.0085		 1.0107	  -0.22%		 +3.51%	  +1.0128	 +1.0085 
 Sterling/Dollar  GBP=		1.2952		 1.2847	  +0.82%		 -4.14%	  +1.2979	 +1.2842 
 Dollar/Canadian  CAD=		1.3246		 1.3245	  +0.01%		 +5.32%	  +1.3259	 +1.3215 
 Australian/Doll  AUD=		0.7208		 0.7172	  +0.50%		 -7.60%	  +0.7218	 +0.7165 
 ar																							  

 Euro/Swiss	   EURCHF=	 1.1376		 1.1339	  +0.33%		 -2.68%	  +1.1382	 +1.1337 
 Euro/Sterling	EURGBP=	 0.8704		 0.8729	  -0.29%		 -2.02%	  +0.8742	 +0.8682 
 NZ Dollar/Dolar  NZD=		0.6754		 0.6708	  +0.69%		 -4.69%	  +0.6756	 +0.6709 
 Dollar/Norway	NOK=		8.4829		 8.5169	  -0.40%		 +3.36%	  +8.5252	 +8.4743 
 Euro/Norway	  EURNOK=	 9.5686		 9.5561	  +0.13%		 -2.84%	  +9.5810	 +9.5476 
 Dollar/Sweden	SEK=		9.0616		 9.1472	  -0.44%		 +10.48%	 +9.1543	 +9.0543 
 Euro/Sweden	  EURSEK=	 10.2183		10.2630	 -0.44%		 +3.85%	  +10.2810	+10.2110 
	 
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Euro positions	http//tmsnrt.rs/2PncT9U 

For news from Reuters Global Investment 2018 Outlook Summit http//www.reuters.com/summit/investment19

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