LONDON: The pound hit 8-month highs versus the dollar on Tuesday, driven by weakness in the US currency, but analysts were cautious about the outlook for sterling as a new round of Brexit talks began, with euro-sterling still firmly above 90 pence per euro.
The dollar index hit new two-year lows on Tuesday, facing the triple woes of diminishing yields, weak US economic data and decreasing demand for safe havens.
Meanwhile, traders are braced for renewed sterling volatility as talks between Britain and the European Union restarted.
"Sterling's recent good performance and resilience to grim economic data has likely relied on the Brexit story being put on the backburner by investors," wrote ING strategists Chris Turner, Francesco Pesole and Petr Krpata.
"We see a non-negligible risk of markets starting to price back in a no-deal outcome," they added.
Britain left the EU in January and is in a transition period during which the country remains in the bloc's single market and customs union. The transition period will finish at the end of 2020 whether or not a trade deal has been reached.
At 1435 GMT, the pound was at $1.3220, up 0.9% since New York's close. As the dollar weakened sterling hit $1.3276, its strongest since the last day of 2019.
Versus the euro, it was up around 0.3% but still above the key 90 pence per euro level, at 90.3.
Analysts say the impact of dollar weakness on the pound-dollar pairing masks sterling's true weakness, with the effect of Brexit-related headlines more likely to be visible in euro-sterling.
But euro-sterling has been stuck in a narrow range: after monthly moves of more than 2% in February, March, April and May, the monthly change was less than 1% in June and July.
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