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FOREX-Dollar helped by funding pressures; weakness in euro, sterling supports

By Saqib Iqbal Ahmed

* Dollar index rises to 3-week high

* New Zealand dollar rises on central bank comments (Recasts with afternoon trading)

By Saqib Iqbal Ahmed

NEW YORK, Sept 26 (Reuters) - The dollar rose to a three-week high against a basket of currencies on Thursday, helped by continued tightness in U.S. money markets, while heightened political tensions and a gloomy economic outlook weighed on the euro and sterling.

A key borrowing cost for Wall Street jumped in recent days prompting the Federal Reserve to pump billions of dollars in longer-term cash into the U.S. banking system.

Analysts have blamed a scarcity of excess reserves for the interest rates in the repurchase agreement market soaring to 10% on Sept. 17, a level not seen since the global credit crisis more than a decade ago.

The persistent bid for U.S. dollars may be a result of ongoing funding pressures, Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said in a note.

The dollar index, which measures the greenback against a basket of other currencies, was up 0.16% at 99.2, its highest since Sept. 3.

Thursday's rise follows a 0.7% jump in the previous session, the largest one-day rise for the index in about three months.

Analysts said the greenback also drew support from mounting political tensions on both sides of the Atlantic: an unfolding effort by U.S. congressional Democrats to impeach President Donald Trump and uncertainty linked to Britain's divorce from the European Union.

The euro was 0.18% lower against the dollar at $1.0921, its weakest since May 2017, amid an increasingly bleak euro zone economic outlook.

The U.S. dollar remains king and the barrage of headlines from all over the map have only solidified that, Brad Bechtel, global head of FX at Jefferies, said in a note.

"While there's no single reason to explain the dollar's strength, multiple factors are in play," said Hussein Sayed, analyst at broker FXTM.

"The UK is facing a political crisis with Brexit, the euro zone is near a recession, bond yields across the developed economies remain very depressed, and investors want a safe place to park their money," he said.

"Despite the impeachment drama, the U.S. dollar continues to cement its place as the major safe haven currency," he added.

Against the Japanese yen, which attracts investors in times of uncertainty, the greenback was little-changed.

The New Zealand dollar gained 0.46% after the central bank governor said it was unlikely he would need to use unconventional monetary policy.

Sterling fell 0.2% as investors waited for the British parliament's next step to break the Brexit impasse and as opposition leaders gathered to discuss tactics.

(Editing by Larry King, Kirsten Donovan and David Gregorio)