Sterling weakens as dollar gains, caution sets in after Brexit deal optimism

LONDON: The British pound fell and the dollar rallied on Monday as traders approached with more caution recent statements that the chances of a breakthrough in Brexit negotiations have gone up.

European Union negotiators said on Friday an agreement with Britain was "very close" and European Commission President Jean-Claude Juncker said on Saturday a deal would be reached in November, if not this month .

That had helped push the pound up above $1.31, but investors booked profits at the start of this week, with some still cautious about whether a Brexit agreement was likely.

Analysts at Commerzbank said a deal remained a long way away, with both sides yet to agree on customs arrangements for the Irish border and Prime Minister Theresa May allegedly trying to gain support among opposition Labour party lawmakers to get a deal voted through parliament.

"To sum it up: Anyone who thought that an end of the Brexit drama is in sight will have to think again," said analyst Thu Lan Nguyen.

With the dollar extending its own broad rally, the pound more than half a percent to as low as $1.3029, erasing recent gains, before recovering to trade at $1.3060.

A broader sell-off across markets prompted a rush into the safety of the U.S. currency and sterling was one of several currencies to rack up losses on Monday.

Versus the euro, the British currency weakened 0.1 percent to 87.955, leaving it slightly below 3-1/2-month highs touched at the end of last week.

Concerns about a row between Brussels and Rome over Italy's proposed budget deficit targets have added to the euro's woes in recent sessions.

Many strategists remain optimistic for sterling's fortunes should the UK make more progress towards a Brexit deal.

The head of sterling portfolios at PIMCO, one of the world's biggest fixed-income investors, told Reuters on Monday the market was "too pessimistic" in pricing in a 40 percent chance of a disorderly Brexit.

Mike Amey said sterling could rally 5-10 percent against the euro if Brussels and London come to a "co-operative solution", and he was moderately long on the pound.