* Pound extends gains as Brexit deal expected on Thursday
* Trade-sensitive currencies rise: Norwegian crown, Aussie dollar, offshore yuan up
* Dollar down as Brexit hopes overshadow stimulus uncertainty
* Graphic: World FX rates in 2020 https://tmsnrt.rs/2RBWI5E (There will be no London-based Forex market report on Dec 25 due to the Christmas holiday)
By Yoruk Bahceli
AMSTERDAM, Dec 24 (Reuters) - Sterling and trade-sensitive currencies including the Norwegian crown and Aussie dollar extended gains on Thursday as Britain and the European Union appeared on the cusp of striking a trade deal, raising hopes the United Kingdom can avoid a turbulent economic departure at the end of the year.
The dollar was on the back foot in holiday-thinned trading as hopes for an agreement that would protect about $1 trillion in annual cross-channel trade from tariffs and quotas sapped demand for the safest assets.
The British pound extended gains and rose as high as $1.3620, after Ireland's foreign minister said a deal was expected on Thursday. As of 1210 GMT it was up 0.7% at $1.3590 with potential to rise to a 2-1/2 year high above $1.3625 once the deal is announced. GBP=D3
The pound also rose to a three-week high against the euro at 89.54 pence. EURGBP=D3
Sources in London and Brussels said a deal was close as British Prime Minister Boris Johnson held a late-night conference call with his senior ministers and negotiators pored over reams of legal trade texts. have to assume that the FX market largely has priced in a 'deal' outcome," Ulrich Leuchtmann, head of FX and commodity research at Commerzbank (DE:CBKG) in Frankfurt, told clients.
But Leuchtmann noted that the pound's rise since Wednesday, when news of a deal first emerged, had not been "spectacular".
While the British currency may strengthen a bit further in later trade and sessions, he says a rally beyond 87 pence against the euro is unjustified.
Across other major European currencies, Norway's crown rallied, having risen as much as 0.4% against the euro at 10.5045 earlier. EURNOK=D3
Andreas Steno Larsen, global chief FX and rates strategist at Nordea in Copenhagen, noted the UK is Norway's biggest destination for exports, making the currency "super sensitive" to Brexit news.
Sweden's crown was also up about 0.2%. EURSEK=D3
Trade sensitive currencies also rose in other regions, with the Australian dollar last up nearly 0.3% to 76.00 U.S. cents AUD=D3 . The offshore yuan was up 0.2% at $6.5186. CNH=EBS
The euro was last unchanged at $1.21915 after a modest rise earlier. EUR=EBS
Brexit hopes overshadowed any concern from U.S. President Donald Trump's demand for changes to a coronavirus aid bill, effectively threatening a government shutdown next week. safe-haven dollar slid further against a basket of currencies on Thursday and was last down 0.2% to 90.239 =USD .
"Republicans and Democrats agreeing on the deal is positive news, and now the delay gives you an upside option of getting more – the (stimulus) bill is unlikely to get worse," said Lauri Halikka, fixed income and FX strategist at SEB in Stockholm.
"So the near-term uncertainty is probably compensated by a chance of getting a larger bill. Further, Biden gets inaugurated in less than a month's time, so the delay is unlikely to get any longer than that in the worst case."
The dollar index has lost more than 6% this year as investors bet the U.S. Federal Reserve would keep its monetary policy ultra-accommodative and fiscal stimulus would speed an economic recovery in 2021.
Expectations for further declines in the dollar support stock markets and emerging-market currencies. if stimulus is not approved and the dollar benefits from safe-haven buying in the shorter term, it will still weaken to $1.23 per euro over the course of 2021, according to Jane Foley, Rabobank's head of FX strategy.
The yen, another safe-haven, was down about 0.1% at 103.680 per dollar JPY=EBS .
Bank of Japan Governor Haruhiko Kuroda said on Thursday the central bank was ready to take new steps to make its massive monetary easing more effective and sustainable.