Sterling drops on Brexit fears, dollar index dips

By Karen Brettell

NEW YORK (Reuters) - Sterling dropped to its lowest levels in almost a year on Wednesday on concerns about Britain's exit from the European Union, while the dollar dipped against a basket of currencies.

The pound dropped as investors ramped up bets on Britain leaving the EU without an agreement with Brussels.

“Markets are slowly starting to price in a higher and higher chance of a 'no deal' type scenario with Brexit,” said Sireen Harajli, foreign exchange strategist at Mizuho in New York.

The dollar index dropped slightly, erasing modest gains made earlier after China imposed retaliatory trade tariffs against the U.S.

The dollar index (.DXY) rose as high as 95.417, near a more than one-year high of 95.652 hit on July 19, before dropping back to 95.058, down 0.16 percent on the day.

Analysts see the dollar as needing a fresh catalyst to move above its recent highs. The index has struggled to break much above the 95.5 level, which it has tested multiple times in the past two months.

China is laying additional import tariffs of 25 percent on $16 billion worth of U.S. goods ranging from oil and steel products to autos and medical equipment, the commerce ministry said.

That came in response to the United States’ decision to impose 25 percent tariffs on another $16 billion of Chinese goods starting on Aug. 23.

Trade tensions have been viewed as positive for the greenback as the U.S. economy is seen as better placed to handle the disputes than emerging markets.

The yuan weakened by 0.08 percent on the day to 6.8256 per dollar.

The Canadian dollar briefly dropped to a two-week low against the greenback as the country’s row with Saudi Arabia escalated, before retracing the loss.

The Financial Times on Wednesday reported that the Saudi Central Bank and pension funds have instructed their overseas asset managers to dispose of Canadian assets.

“Some selling by a significant owner of Canadian assets will leave a mark on the Canadian dollar,” said Bipan Rai, North American head, FX strategy at CIBC Capital Markets in Toronto.

The yen gained after reports that Bank of Japan board members had disagreed on how far interest rates should be allowed to move from the central bank's target.

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.

(Additional reporting by Tommy Wilkes in London; Editing by Meredith Mazzilli and Lisa Shumaker)