November 16, 2018 / 2:15 AM / a month ago

FOREX-Sterling reels on deepening Brexit crisis; yen gains

* Dollar and yen bid as investors rush to safe haven assets

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

By Vatsal Srivastava

SINGAPORE, Nov 16 (Reuters) - Investors in the British pound remained on edge in early Asian trade on Friday after the currency suffered a tumultuous slide overnight on fears the country could crash out of the European Union without a divorce deal.

Both the and the yen benefited from a deepening crisis for UK Prime Minister Theresa May after the resignation of key ministers from her government imperiled her Brexit plan.

The resignations, including that of Brexit minister Dominic Raab, came hours after May had claimed backing for a draft divorce deal. The hostility from government and opposition lawmakers raised the risk that the deal would be rejected in parliament, and that Britain could leave the EU on March 29 without a safety net..

That left the sterling vulnerable to further losses. It was changing hands at $1.2788, after declining 1.7 percent on Thursday, its steepest percentage decline since Oct. 11 2016. It also lost around the same value against the yen the previous day.

“Political troubles are never good for the currency but in the case of the UK, the pound could drop to 1.25 versus the dollar on the prospect of a no deal Brexit, leadership challenge and slower growth,” said Kathy Lien, managing director of currency strategy at BK Asset Management in a note.

The euro traded marginally higher at $1.1338. Investors were hopeful after reports out of Italy said that Italian Prime Minister Giuseppe Conte was looking to work with the EU over his government’s 2019 budget, which has been rejected by Brussels.

The single currency has gained over the last three trading sessions, but was up only 0.1 percent versus the dollar month to date, underscoring the strains from weakening economic momentum Europe, Italian budget woes and the Brexit uncertainty.

The dollar index, a gauge of its value versus six major peers, traded at 96.96, up 0.04 percent on Friday. The dollar index hit a 16-month high of 97.69 at the start of the week.

Currency markets were also keeping an eye on the U.S.-Sino trade tensions as traders looked for concrete signs the economic powers were seeking to de-escalate their dispute.

A Financial Times report said U.S. Trade Representative Robert Lighthizer has told some industry executives that another round of U.S. tariffs on Chinese imports has been put on hold. But a U.S. Trade Representative spokesperson later denied this report.

“This is a clear sign of the tussle taking place between the doves and hawks in the trade camp..we will be hearing more of this till the upcoming G-20 meet,” said Sim Moh Siong, currency strategist at Bank of Singapore.

Most analysts forecast the dollar to remain well supported in coming months thanks to the Federal Reserve’s commitment to continue to gradually raise interest rates. A fourth hike for this year is expected next month, backed by a robust economy and rising wage pressures.

The safe-haven yen was well bid, changing hands at 113.46, as the Brexit turmoil drew investors toward the Japanese currency. The yen had hit a six-week low of 114.20 on Monday before reversing course.

The Australian dollar traded steady at $0.7272, having gained 0.58 percent on Thursday on the back of stronger than expected jobs data.

Reporting by Vatsal Srivastava Editing by Shri Navaratnam

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