Pound near 20-month low on Brexit setback, dollar steadies after surge

By Shinichi Saoshiro

TOKYO (Reuters) - The pound languished near 20-month lows against the dollar on Tuesday after British Prime Minister Theresa May postponed a crucial vote on her Brexit deal, raising the risk of a chaotic exit from the European Union.

May on Monday postponed a parliamentary vote, which was due to take place on Tuesday, on her Brexit deal to seek more concessions. The move stoked more uncertainty as Britain now faces Brexit without a deal, a last-minute agreement or another EU referendum.

Sterling crawled up 0.1 percent to $1.2574 (0.9879 pounds) <GBP=D4> after slumping 1.3 percent the previous day, when the currency brushed $1.2507, its lowest since April 2017.

The pound's slide was a boon for the dollar, which rallied back from a 2-1/2-week low against a basket of currencies initially driven by a growing view the Federal Reserve could pause its rate hike cycle sooner than previously thought.

The dollar index, a measure of the greenback's strength versus a group of six major peers, was a touch lower at 97.092 <.DXY> after rallying 0.75 percent on Monday. At one stage in overnight trade it had fallen to 96.364, its lowest since Nov. 22.

"Falling U.S. yields will eventually nudge the dollar into a downtrend, but probably not at this moment," said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

"There just isn't enough demand for the yen, which is less of a safe haven, and the euro, with the political concerns in Europe. And there is of course the pound which is burdened with Brexit problems."

The 10-year Treasury note yield <US10YT=RR> has dropped to a three-month low this week, with dovish comments from Fed officials and soft U.S. data further sharpening views on an imminent pause in the tightening cycle.

The euro nudged up to $1.1365 <EUR=> after shedding 0.2 percent on Monday.

The common currency did gain against the struggling pound, although concerns over violent protests in France against President Emmanuel Macron's economic reform limited its gains.

The dollar dipped 0.25 percent to 113.02 yen <JPY=> after advancing 0.5 percent overnight.

"It is difficult to draw a very bearish scenario for the dollar as talk of the U.S. economy slipping into recession and the Fed switching to monetary easing from tightening seems too far fetched at this point," said Koji Fukaya, president at FPG Securities in Tokyo.

"Whenever there is a global risk-off event, the dollar will find demand - as long as the risk aversion does not originate in the United States."

The Indian rupee was jolted after Reserve Bank of India Governor, Urjit Patel, resigned abruptly on Monday after a months-long tussle over policy with the government that has raised concerns about the bank's independence.

Indian rupee forwards <INRNDFOR=> fell more than 1 percent on Monday, posting their biggest daily slump in more than five years.

The Australian dollar rose 0.1 percent to $0.7197 <AUD=D4> after slipping on Monday to a one-month low of $0.7170.

(Editing by Shri Navaratnam)