Weak dollar, Brexit deal hopes push pound up for second day

LONDON (Reuters) - Sterling climbed for a second consecutive day on Tuesday as a struggling dollar and growing expectations of a Brexit deal fuelled demand for the British currency.

Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. The GSA delivers new and collects old currency for the Austrian National Bank. REUTERS/Leonhard Foeger

The pound rose 0.4 percent to $1.3175 as traders covered some of their short bets after a big selloff last week.

“We are starting to see movement from London and Brussels towards a Brexit deal and that is helping sentiment,” said fund manager Constantin Bolz of wealth manager Portfolio Concepts.

The dollar fell a fifth of a percent to 94.06 against a basket of its rivals as investors raised bets the U.S. central bank is nearing the end of its rate hiking cycle. The Federal Reserve is set to raise interest rates on Wednesday.

With just over six months until Britain leaves the European Union, UK Prime Minister Theresa May has yet to reach a deal with Brussels on the terms of its departure. Her plan for future trade ties was rebuffed by the EU last week.

British Brexit Secretary Dominic Raab said on Monday that he was confident that Britain would make progress and eventually clinch a Brexit deal.

Investors have been hedging against more weakness in sterling should the negotiations with the EU collapse, although some say large short bets on the pound make it vulnerable to any positive headlines.

Still investors were wary of pushing sterling above last week’s high of $1.3295 as concerns about the British political situation dogged sentiment.

Britain’s opposition Labour Party is set to vote against any deal Prime Minister Theresa May clinches with the European Union and is open to a second referendum with the option of staying in the bloc, Brexit spokesman Keir Starmer said.

Against the euro, the British currency was broadly flat at 89.54 pence.

Reporting by Saikat Chatterjee; Editing by Raissa Kasolowsky