Sterling tumbles on Brexit worries; dollar rebounds

By Richard Leong

NEW YORK (Reuters) - The pound slid to its weakest level in nearly 1-1/2 years against the dollar on Monday as British Prime Minister Theresa May postponed a parliamentary vote on her Brexit deal, rekindling doubts about U.K.'s departure from the European Union in March.

The greenback enjoyed a mild recovery following its steepest weekly drop versus a basket of currencies in three months last week, as traders reduced their expectations that the Federal Reserve might pause its interest rate hikes sooner than previously thought.

"It's definitely weakening the pound," said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston. "It's casting more uncertainty about a Brexit vote."

The U.K. parliamentary vote for May's Brexit proposal was set for Tuesday. Opponents and supporters of Brexit joined in opposition to her deal.

At 10:21 a.m. (1521 GMT), the sterling was down 0.63 percent at $1.2645 after touching $1.2606, which was the lowest since June 2017.

The euro hit a three-month peak versus the pound at 90.47 pence. It was last up 0.77 percent at 90.22 pence.

The greenback strengthened versus a basket of currencies that includes the euro as traders trimmed their earlier bets on a less aggressive Federal Reserve.

Widening interest rate differentials between the United States and the rest of the world, driven by a confident U.S. Federal Reserve, has fueled an unlikely dollar rally this year. However, weak data in recent weeks has clouded the currency's prospects for next year.

"You are getting a bit of reprieve from a very dovish view for the Fed in the next 12 months," Tomes said.

The futures market implied traders expected the U.S. central bank to raise key lending rates by a quarter point at its Dec. 18-19 meeting to 2.25-2.50 percent, marking its fourth rate hike in 2018. They now saw no more than one rate increase in 2019, down from two a month ago, according to CME Group's FedWatch program.

An index that tracks the dollar versus a group of six currencies <.DXY> was up 0.31 percent at 96.81 after falling 0.78 percent last week.

(For a graphic on 'World FX rates in 2018' click http://tmsnrt.rs/2egbfVh)

(Additional reporting by Saikat Chatterjee in LONDON, Hideyuki Sano in TOKYO; Editing by Larry King and Frances Kerry)

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