FOREX-Sterling in defensive mood on concerns about no-deal Brexit

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* 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 analysts said.
"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 GBP=D4 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 NZD=D4 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 future. Interest rate swaps showed a 79% chance of a 25 basis point
rate cut at the RBNZ's next policy meeting on Aug. 7.
RBNZWATCH
"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 EUR=EBS 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. ECBWATCH
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 JPY=EBS . The dollar index
.DXY 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.