* Futures markets lift probability of U.S. rate increases
* Long euro positions wilt as dollar bounces
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Sept 27 (Reuters) - The euro hit a fresh one-month low on Wednesday as an ongoing dollar short squeeze and reaction to the German election encouraged investors to take profits on one of the best performing currency trades this year.
Having gained more than 14 percent this year, the single currency has given back nearly 3 percent since hitting a January 2015 peak of $1.2092 earlier this month as investors rapidly repriced expectations of a U.S. rate increase in the coming days.
Futures markets have increased the likelihood of a U.S. rate rise by December to as much as 70 percent, compared to less than 20 percent only a month ago, and overnight hawkish comments by Fed Chair Janet Yellen have only boosted those bets.
“The divergence between U.S. and euro zone data surprises is closing rapidly and while the once popular dollar parity forecasts still look ridiculous, the euro looks past its peak,” said Sean Maher, an independent macro-strategist based in London.
The euro slipped 0.4 percent to $1.1747 in early trades, its lowest level since Aug. 23. It has fallen more than 1.5 percent this week against a resurgent greenback.
The euro weakened against other currencies as well, hitting a 10-week low against the British pound and a two-week low of 1.14075 Swiss franc.
“It isn’t realistic to expect EUR/USD 1.10 to be revisited any time soon but a further correction seems likely, closing some of the (clearly visible) gap in recent trends in rates and currency,” said Kit Juckes, an FX strategist at Societe Generale in London.
Investor sentiment toward the euro was dented by the rise of a far-right party and the decline of traditional parties in Sunday’s German election, which has left Chancellor Angela Merkel struggling to form a coalition government.
Tensions are also rising in Catalonia, as Spain’s government said on Tuesday that police would take control of voting booths in Catalonia to help thwart the region’s planned independence referendum that Madrid has declared illegal.
A big focus for currency markets on Wednesday will be the announcement of a tax plan by the U.S. administration and Republicans in Congress.
The plan has been developed over several months by six White House and congressional Republicans working behind closed doors. President Donald Trump told U.S. lawmakers on Tuesday he wants bipartisan cooperation on tax reform.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano in TOKYO; Editing by Susan Fenton)
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