By Tom Westbrook
SINGAPORE (Reuters) - The British pound nursed losses on Wednesday, after hitting a one-month low on reports that Brexit talks between Britain and the European Union were close to breaking down, while the dollar weakened slightly on rising trade tensions.
In a telephone call on Tuesday, German Chancellor Angela Merkel told British Prime Minister Boris Johnson that a deal was "overwhelmingly unlikely," a Downing Street source said.
That leaves the outcome on Oct. 31, when Britain is due to quit the EU, deeply uncertain, and the pound dropped half a percent to its lowest since early September. It recouped a fraction of the fall in Asian trade to hold at $1.2217.
The dollar, meanwhile, gave up some ground gained overnight as the U.S. imposition of visa restrictions on Chinese officials over the treatment of Muslim minorities threatened to derail already delicate trade negotiations.
The move, together with the blacklisting of Chinese firms over the same issue, cast a pall over Sino-U.S. talks in Washington, sending investors to safety.
"The tensions will persist through to the year-end at least," said Westpac analyst Imre Speizer in Auckland, who is not expecting the talks to deliver a breakthrough deal.
"It'll be volatile good news, bad news, repeat for the rest of the year, but overall a negative tone."
The safe-haven Japanese yen edged higher, with the dollar buying 107.00 yen.
In other markets, stocks tumbled and bond yields fell.
Safe-haven flows had also supported the dollar overnight, along with comments from Federal Reserve Chairman Jerome Powell, which were interpreted as suggesting further rate cuts later in October were not a done deal.
On Wednesday, against a basket of currencies the dollar (DXY) was slightly softer at 99.126, while it fell marginally against the trade-exposed Australian and New Zealand dollars.
The Aussie traded at $0.6731 and the kiwi at $0.6304.
The euro (EUR=) was steady at $1.0957 as Brexit jitters stalled its gradual recovery from a 2-1/2-year low hit last week.
Graphic: World FX rates in 2019 - http://tmsnrt.rs/2egbfVh
U.S. and Chinese trade deputies are meeting in Washington ahead of high-level talks involving Chinese Vice Premier Liu He, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin on Thursday.
But prospects for progress appear to be dimming as tensions rise. A Chinese diplomat told Reuters that China wanted a deal, but it cannot be a "zero-sum game".
The Trump administration, meanwhile, is moving ahead with discussions around restrictions on capital flows into China, Bloomberg reported on Tuesday, citing people familiar with the matter.
"The relationship between China and the U.S. continues to deteriorate," said Michael McCarthy, chief market strategist at broker CMC Markets in Sydney.
"Hopes for progress at the Washington meeting of top negotiators on Thursday night fell with risk assets."
The Chinese yuan , the most sensitive currency to the trade talks, had dropped to a one-month low overnight and was steady near that level at 7.1600 per dollar in offshore trade.