By Stanley White
TOKYO (Reuters) - Sterling was on the back foot on Tuesday as investors worried Boris Johnson, the frontrunner to become the UK's next prime minister, would trigger a "hard Brexit" from the European Union, widely seen as a major risk for the British economy.
The euro traded near session lows due to growing expectations European Central Bank President Mario Draghi will signal a rate cut in September at a policy meeting later this week to keep inflation expectations on track.
In Asia, regional currencies were mostly beholden to moves in major global units though investors are watching for any developments in China-U.S. trade negotiations.
The dollar was hemmed in against other major currencies as expectations for a U.S. Federal Reserve rate cut next week sent Treasury yields lower.
Speculation over the likelihood of a no-deal Brexit and questions over how far major central banks will ease monetary policy are likely to set the tone for currency markets in coming weeks, traders and analysts said.
"Johnson is expected to become the new prime minister, so there is a real chance of a hard Brexit," said Takuya Kanda, general manager of research at Gaitame.Com Research Institute.
"In the short-term, further declines in the pound could be limited because positions are already very short. In the medium-term, sentiment for sterling will remain soft."
The pound traded at $1.2477, within striking distance of a 27-month low of $1.2382 reached last week.
Sterling has fallen 3.5% versus the dollar in the past three months due to uncertainty about how Britain will avoid a no-deal exit from the EU.
Britain's Conservative Party will announce the results of a leadership election on Tuesday, with Johnson widely expected to win, setting him up to become prime minister on Wednesday.
There is growing speculation Johnson will pull Britain out of the EU on Oct. 31 without a trade deal in place.
Hedge funds have increased short positions on the pound to a 10-month high in the week to July 16, Commodity Futures Trading Commission data shows.
The euro (EUR=EBS) held steady at $1.1208 as traders awaited the ECB's policy meeting and Draghi's comments at a press conference on Thursday.
Traders see a 43% probability that European policymakers will lower a key deposit rate by 10 basis points to minus 0.50% to combat risk from global trade tensions.
Economists surveyed by Reuters expect the ECB to change its forward guidance to pave the way for a rate cut in September.
The dollar was little changed at 107.91 yen . The dollar index (DXY) was marginally higher at 97.314.
The U.S. central bank is widely expected to lower its target range of 2.25%-2.50% by 25 basis points at a meeting ending July 31, but expectations for a larger 50-basis point cut have waxed and waned due to mixed signals from Fed policymakers.