* Graphic: World FX rates in 2019
* Investors focus on Britain's new prime minister
* Expectations for dovish ECB hurt euro
* Dollar little changed as rate cut expectations fluctuate
(Adds New Zealand dollar, strategist's quote)
By Stanley White
TOKYO, July 23 (Reuters) - Sterling was on the back foot on
Tuesday as investors worried Boris Johnson, the frontrunner to become
the UK's next prime minister, would trigger a "hard Brexit"
from the European Union, widely seen as a major risk for the British economy.
The euro briefly touched the lowest in five weeks due to growing
expectations European Central Bank President Mario Draghi will signal
a rate cut in September at a policy meeting later this week to keep
inflation expectations on track.
The New Zealand dollar fell after Bloomberg News reported that the
country's central bank is refreshing its strategies for unconventional
monetary policy, but trading in other Asian currencies was subdued as
investors awaited major developments in China-U.S. trade negotiations.
The dollar edged higher against the yen but was hemmed in against
other major currencies on expectations for a U.S. Federal Reserve rate
cut next week.
Speculation over the likelihood of a no-deal Brexit and questions
over how far major central banks will ease monetary policy are likely
to set the tone for currency markets in coming weeks, traders and
"Johnson is expected to become the new prime minister, so
there is a real chance of a hard Brexit," said Takuya Kanda,
general manager of research at Gaitame.Com Research Institute in Tokyo.
"In the short term, further declines in the pound could be
limited because positions are already very short. In the medium term,
sentiment for sterling will remain soft."
The pound traded at $1.2459, within striking distance of a
27-month low of $1.2382 reached last week.
Sterling has fallen 3.7% versus the dollar in the past three
months due to uncertainty about how Britain will avoid a no-deal exit
from the EU.
Britain's Conservative Party will announce the results of a
leadership election on Tuesday, with Johnson widely expected to win,
setting him up to become prime minister on Wednesday.
There is growing speculation Johnson will pull Britain out of the
EU on Oct. 31 without a trade deal in place.
Hedge funds have increased short positions on the pound to a
10-month high in the week to July 16, Commodity Futures Trading
Commission data shows.
The New Zealand dollar fell 0.4% to $0.6734, putting the kiwi
on track for a third straight day of losses.
The Reserve Bank of New Zealand has "begun scoping a project
to refresh our unconventional monetary policy strategy and
implementation," the central bank said, according to a Bloomberg
News article published on Tuesday.
The RBNZ kept the official cash rate at a record low of 1.50% in
June but warned that interest rate cuts may be necessary in the
Interest rate swaps showed a 79% chance of a 25 basis point rate
cut at the RBNZ's next policy meeting on Aug. 7.
"The Bloomberg story has struck a nerve because it can be
linked to speculation about a rate cut at the next policy
meeting," said Yukio Ishizuki, foreign exchange strategist at
Daiwa Securities in Tokyo.
"It's possible for the kiwi to go a little lower. The
currency market is focused completely on central bank policy moves."
The euro briefly fell to $1.1191, the lowest since June 19, as
traders awaited the ECB's policy meeting and Draghi's comments at a
news conference on Thursday.
Traders see a 43% probability that European policymakers will
lower a key deposit rate by 10 basis points to minus 0.50% to combat
risk from global trade tensions.
Economists surveyed by Reuters expect the ECB to change its
forward guidance to pave the way for a rate cut in September.
The dollar traded at 108.14 yen . The dollar index
was marginally higher at 97.435.
The U.S. central bank is widely expected to lower its target range
of 2.25%-2.50% by 25 basis points at a meeting ending July 31, but
expectations for a larger 50-basis point cut have waxed and waned due
to mixed signals from Fed policymakers.
(Reporting by Stanley White; Editing by Sam Holmes and Jacqueline Wong)
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