Investing.com -- The dollar was touching its highest level in two months in early trading in Europe Monday, rising sharply against a British pound that came under renewed attack on rising fears of a “hard” Brexit.
The pound fell to its lowest in nearly three years against the dollar after Michael Gove, a senior figure in the new government, wrote that there is now a “very real” possibility of the U.K. crashing out of the EU on Oct. 31 without transitional arrangements in place to cushion the blow to the economy.
By contrast, Prime Minister Boris Johnson had said repeatedly during his recent leadership campaign that there was only a “one in a million” chance of the U.K. leaving the EU without a transitional deal, despite saying that the deal drawn up by Theresa May was “dead” and despite the lack of time available to negotiate a new one before the deadline.
By 3:50 AM ET (0750 GMT), the pound was at $1.2339, just above an intraday low of $1.2335, its lowest since October 2016. The euro also pushed above 90 pence for the first time in three weeks to stand at 0.9012 GBP.
The dollar index, which tracks the greenback against a basket of currencies, was at 97.828, just five ticks below its intraday high, and consolidating gains made on Friday on the back of slightly stronger-than-expected gross domestic product data for the second quarter.
Sterling weakness apart, traders were largely content to sit on their hands ahead of the Federal Reserve’s and Bank of Japan’s policy meetings later this week.
The GDP figures had shown that the U.S. economy grew at an annualized pace of 2.1% in the three months to June, a less dramatic slowdown than feared. Consequently, the odds of a half-point cut from the Fed, rather than the 25 basis point consensus, appeared to have shrunk.
“Since the trade dispute between the U.S. and China is still far from settled and global growth expectations have fallen since the start of the year, the Fed will probably opt for a cautious interest rate cut, to stabilize the growth and inflation figures,” Frank Haeusler, chief strategist at Vontobal Asset Management, said in a note to clients.
Haeusler also noted that the Fed may move up to the end of summer its schedule for ending its process of balance sheet reduction, a process that tightens dollar liquidity all other things being equal.
Overnight, the Chinese yuan fell sharply on the eve of fresh trade talks with the U.S. The development followed fresh pressure from President Donald Trump, who started efforts at the weekend to have China redesignated as an industrialized country by the World Trade Organization. That measure would end some of the privileges it enjoys under current rules as a developing nation.
By the closed in China, the dollar was at 6.8895 yuan, down from an intraday high of 6.8959 that was its highest level in three weeks.