FOREX-Dollar set for biggest winning streak in two years

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Feb 12 (Reuters) - The dollar was on track for its longest winning streak in two years on Tuesday, as hopes of a breakthrough in U.S-China trade talks and a tentative deal to avoid a U.S. government shutdown encouraged investors to cover short bets on the currency.

At the end of 2018, the dollar was the consensus short trade among hedge funds, as traders bet the U.S. Federal Reserve would pause in its rate increases and other major economies would grow quickly.

But while the Fed held interest rates steady last month, the case for buying the euro and the pound has weakened steadily. Economic data in Europe have deteriorated and Brexit concerns have dogged the British pound.

"It is remarkable for the dollar to post this kind of rising streak after a dovish Fed last month, and it shows how cautious investors are becoming over the outlook of the global economy," said Lee Hardman, a currency strategist at MUFG in London.

The dollar has gained for nine consecutive sessions, its longest series of gains since February 2017, according to Refinitiv data. It was a touch higher at 97.063 on Tuesday.

On Jan. 30, the Fed said it would be "patient" before raising rates again and signaled its balance sheet would remain larger than previously expected.

PET CURRENCY Also helping the dollar were talks on trade between the United (Shenzhen: 000925.SZ - news) States and China. The talks resumed in Beijing this week after an earlier round ended in Washington last week without a deal, and the top U.S. negotiator said a lot remained to be done.

"The dollar is the market's pet currency at present regardless of whether concerns about the global economy are on the rise or whether (there are) risks in connection with the trade conflict between China and the U.S. as well as the government shutdown," Commerzbank (Xetra: CBK100 - news) currency strategists said.

U.S. lawmakers reached a tentative agreement on border- security funding that might help avert another government shutdown, due to start on Saturday (Shenzhen: 002291.SZ - news) .

Despite the market concerns, overall currency volatility has fallen in recent weeks. A Deutsche Bank (IOB: 0H7D.IL - news) gauge is trading near its lowest in six months at 7.5 and has fallen by nearly a quarter from early January highs.

The euro, meanwhile, has suffered from weak European economic data. On Tuesday, it held near the 2 1/2-month low of $1.1267 hit the day before.

Sterling was steady at $1.2878 before a statement by Prime Minister Theresa May to lawmakers in parliament.

With (Other OTC: WWTH - news) just weeks to go before Britain leaves the European Union on March 29, investors are growing increasingly worried that a Brexit deal may not be completed in time.

(Reporting by Saikat Chatterjee, additional reporting by Ritvik Carvalho; editing by Larry King)