August 6, 2018 / 1:27 AM / 3 months ago

Sterling drops on Brexit fears, trade tensions boost dollar

NEW YORK (Reuters) - Concerns about Britain’s plan to leave the European Union sent the pound to an 11-month low against the greenback on Monday, while U.S.-China trade tensions helped boost the U.S. currency.

British Pound Sterling banknotes are seen at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

Comments by officials about a no-deal Brexit stoked fears Britain would crash out of the union without securing a trade agreement.

“Some of the political noise we’re been receiving across the pond reintroduced the Brexit discount into sterling,” said Mazen Issa, senior FX strategist at TD Securities in New York.

The pound GBP= fell as low as $1.2917 before retracing to $1.2940, down 0.50 percent on the day.

Worries that Italy will ramp up spending and challenge European Union budget rules, and a drop in German industrial orders in June, also weighed on the euro.

The euro zone single currency EUR=EBS fell to a five-week low of $1.1527 before rising back to $1.1552, down 0.13 percent.

Technical support around $1.15 may prop up the euro in coming days.

“I think a move below that would require a fresh catalyst,” said Issa.

The dollar, meanwhile, was boosted by trade war rhetoric.

China proposed retaliatory tariffs on $60 billion worth of U.S. goods ranging from liquefied natural gas to some aircraft on Friday, as a senior Chinese diplomat cast doubt on prospects of talks with Washington to solve their bitter trade conflict.

Some analysts see trade tensions as beneficial for the U.S. dollar as the economy is better placed to handle protectionism than emerging markets, and as tariffs may narrow the U.S. trade deficit.

“Trade tensions are very much dollar positive so I suspect that’s contributing to the dollar gains today,” said Erik Nelson, a currency strategist at Wells Fargo in New York.

Chinese stocks .SSEC fell 1.3 percent on Monday.

Since mid-April, the dollar index .DXY has gained 6 percent while an emerging-market local currency bond exchange traded fund (LEMB.K) has fallen more than 10 percent over the same period.

Against a broad basket of currencies .DXY, the dollar was last up 0.24 percent to 95.367. It is within striking distance of a more-than-one-year peak of 95.652 reached on July 19, which is also seen as having technical resistance.

The main U.S. economic focus this week will be Friday’s consumer price inflation report for July, which is expected to show a 0.2 percent increase in core inflation in the month, according to a Reuters poll.

(The story corrects to European Union from euro zone in the first paragraph.)

Additional reporting by Saikat Chatterjee in London; Editing by Nick Zieminski and James Dalgleish

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