Dollar holds at two-month high, Brexit kicks pound to 28-month low

By Kate Duguid

NEW YORK (Reuters) - The dollar held near a two-month high on Monday ahead of what is expected to be the first U.S. interest rate cut since the financial crisis, while the rising risk that Britain will exit the European Union without a deal knocked the pound to a 28-month low.

The Federal Reserve is forecast to cut interest rates on Wednesday by 25 basis points. The move would be a so-called insurance cut to protect the U.S. economy from global uncertainties and trade pressures, in contrast to cuts by countries facing more imminent risks.

The dollar index <.DXY> was up 0.02% in afternoon trade at 98.027. Better-than-expected U.S. GDP data published on Friday had buoyed the index against rivals; the greenback retained those gains on Monday, hitting a fresh two-month top. But some of that move was retraced as traders refrained from placing big bets ahead of the Fed decision.

"It is quiet as the market is waiting for the Fed. The dollar is generally well-supported. It seems like the market is expecting the Fed to struggle to be very dovish relative to expectations," said Daniel Katzive, head of foreign exchange strategy for North America at BNP Paribas.

Despite Friday's strong economic growth figures, "the markets are still pricing in very dovish guidance, with about 75 basis points in rate cuts projected this year. Hence, there could be sore disappointment if the Fed doesn't fully deliver," wrote analysts at Action Economics.

"This could, with the ECB gearing up for a rate cut in September, keep the dollar underpinned, and maintain EUR-USD's downward directional bias."

The euro was modestly higher at $1.115 after hitting Thursday's bottom of $1.110, its lowest since May 2017.

GRAPHIC: World FX rates in 2019 - http://tmsnrt.rs/2egbfVh

Also on Monday, the British pound fell more than 1% to a 28-month low as investors scrambled to factor in the growing risk of a no-deal Brexit and the chance that new British Prime Minister Boris Johnson will call an early election.

"It's pretty clear the market is getting more concerned about a no-deal Brexit after the weekend press," said Katzive. "And that's starting to generate the kind of volatility that a lot of people thought was maybe overdue."

(Reporting by Kate Duguid and Marc Jones; Editing by Marguerita Choy)

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