Sterling plummets on Brexit fears, lifting dollar

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NEW YORK (Reuters) - Sterling plummeted on Friday, driving the U.S. dollar up, after British Prime Minister Theresa May said the European Union must supply an alternative Brexit proposal, saying talks had reached an impasse after the bloc’s leaders had rejected her plans without fully explaining why.

The pound GBP= was down 1.5 percent on Friday, set for its biggest daily loss since June 2017. The dollar rose on the back of the pound's move, rebounding from early lows but was still on track for its biggest weekly drop since February as stronger equity markets and rising bond yields fueled a rush to buy riskier assets.

At a summit in Austria on Thursday, EU leaders said they would push for a Brexit deal next month but rejected May’s “Chequers” plan, saying she needed to give ground on trade and arrangements for the UK border with Ireland.

“Sterling bears are out in full force. They’ve pushed the pound quite aggressively down this morning,” said Dean Popplewell, chief currency strategist at Oanda in Toronto, “and it looks like they want to push things further.”

The dollar index rose 0.36 percent .DXY to 94.229 as investors consolidated positions before the weekend, but the greenback was still set for its biggest weekly drop since February.

“On the back of (the pound’s fall), it’s interesting the dollar got a bit of a bid as well. The trade woes in the last 48 hours took a bit of a back seat and it did allow some of the risk takers to set their sights on some of the other G7 currencies,” said Popplewell.

A selloff in the dollar that began on Thursday gathered steam overnight as investors ramped up bets that the U.S. Federal Reserve will be near the end of its rate-rising cycle after an expected increase next week.

Market expectations are for approximately two increases to U.S. interest rates next year and Russell Investments said that medium-term recession risks in the U.S. economy are now elevated, pointing to a number of indicators such as a tightening labor market.

With trade war concerns receding and emerging market central banks led by Turkey taking measures to stabilize their currencies, investors pushed up the euro to the $1.18 line for the first time in more than three months during the European session. The dollar's bounce, however, pushed the single currency EUR= back into the red at $1.175.

Reporting by Kate Duguid and Saikat Chatterjee; Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Andrea Ricci