* Euro plunges to 26-month low vs dollar
* Decline comes after Fed sounds less dovish than expected
* Sterling hits 30-month low vs dollar
* Fed rhetoric, Brexit worries blamed
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
(Adds new quotes, updates prices)
By Olga Cotaga
LONDON, Aug 1 (Reuters) - Gains in the dollar after the
Federal Reserve sounded cautious on more rate cuts sent the euro
to a 26-month low on Thursday, as investors decided a lengthy
U.S. easing cycle was unlikely.
In a widely expected move, the U.S. central bank cut rates
on Wednesday for the first time since the financial crisis, in
response to the growing risk of higher import tariffs and a
slowdown in the world's major economies. But it also signalled
that the quarter point cut may not be the start of a lengthy
campaign to shore up the economy.
"It's not the beginning of a long series of rate cuts," Fed
Chairman Jerome Powell said after the Fed's decision, although
he added, "I didn't say it's just one rate cut."
The Fed's less dovish than expected message triggered a
rebound in the dollar, sending the dollar index .DXY to a
26-month high of 98.93 on Thursday.
The euro EUR=EBS weakened to a 26-month low of $1.1034 and
sterling GBP=D3 touched a 30-month low of $1.2087.
However, both the euro and the pound were gripped by their
own issues.
"You want to stay short euro and sell the rallies," said
Stephen Gally, European head of forex strategy at BMO Capital
Markets.
Data from the Commodity Futures Trading Commission shows
that hedge funds have been doing just that. Short euro positions
increased to $5.44 billion in the week to July 26.
Investors expect the European Central Bank to take a more
aggressive stance on monetary policy easing than the Fed, which
would dampen appetite for the common currency. Fears that
Britain may exit the European Union on Oct. 31 without
transitional trade agreements in place hurt sterling and the
euro.
"With growth slowing below potential and inflation already
well below target, there is a strong case for the ECB to act as
soon as possible," said Lee Hardman, currency strategist at
MUFG.
"The increasing likelihood of a 'no-deal' Brexit and lack of
progress in recent U.S.-China trade talks highlight that the
outlook for the euro zone economy could yet be hit by more
negative shocks heading into year end," Hardman said. "In these
circumstances, the euro remains vulnerable to further weakness."
The euro was last down 0.3% at $1.1037. The pound was lower
by 0.2% against the euro at 91.29 pence EURGBP=D3 .
Britain's deputy finance minister, Rishi Sunak, said the UK
wants a Brexit deal, but "we must have the firmness to leave
(the EU) if necessary without a deal." Investors and analysts expect sterling to decline further as
more headlines emphasize the growing probability Britain will
quit the European Union without trade agreements on Oct. 31.
Sentiment for sterling has weakened since Britain's new
prime minister, Boris Johnson, packed his cabinet with Brexit
supporters last month.
Traders will be watching the Bank of England monetary policy
announcement later on Thursday to see whether it will respond to
the growing probability of a no-deal Brexit. The BoE is widely
expected to keep its benchmark interest rate unchanged at 0.75%.
Elsewhere, the Japanese yen fell to a three-month low of
109.32 against the dollar and was last down 0.3% at 109.09. The
Swiss franc was up 0.2% at 1.0983 against the euro and the
Australian dollar was unchanged at 0.6847 against the dollar.
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Dollar rises to 26-month high https://tmsnrt.rs/2MwPS1A
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