US dollar claws back losses as Brexit nerves hurt pound

London

THE US dollar recovered from earlier losses on Tuesday after legal advice from Britain's top lawyer dented hopes for a Brexit breakthrough and left investors nervous about buying into riskier currencies.

The developments reversed markets' earlier, buoyant mood spurred by news that British Prime Minister Theresa May had secured legally binding assurances from the EU hours ahead of a parliamentary vote on her Brexit withdrawal deal.

But British Attorney General Geoffrey Cox said his legal advice had not changed: Britain could not unilaterally withdraw from the so-called Irish border backstop - a key demand from eurosceptic lawmakers whose support is crucial if Mrs May is to get her deal passed by parliament later on Tuesday.

Equity markets too reversed gains and sterling skidded into the red, although the mood in emerging markets remained positive. US bond yields also rose as the Brexit mood shifted.

After big gains earlier in the day, the pound was down 0.8 per cent at US$1.3050, having hit a high of US$1.3290 overnight.

Against the euro too, sterling tumbled, losing more than 1 per cent to 86.53 pence per euro.

"The pound is slipping back as markets remain rightly cautious on the prospect of the new, improved deal making it through parliament, but earlier hopes that a hard Brexit can be averted plus broader gains in EM stocks so far this week lifted the risk-taking mood in the markets overall," Scotiabank analysts said in a note to clients.

The dollar index recovered to 97.252 after earlier dropping 0.3 per cent against a basket of currencies to 96.838.

The Japanese yen, popular when investors turn nervous, erased earlier losses to trade unchanged at 111.27 yen .

The euro was steady at US$1.1253.

The Swedish crown fell after February inflation came in slightly below expectations, settling at 10.5850 crowns per euro, down 0.4 per cent.

The Norwegian crown strengthened slightly after a positive central bank activity survey, touching 9.7270 crowns per euro.

It had firmed 0.8 per cent against the single currency on Monday after strong inflation data fanned expectations of an interest rate rise.

ING analysts said that should the Norwegian central bank raise rates twice in 2019, as it expects, the crown could strengthen to 9.65 over the following month and then towards 9.5. REUTERS