* 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
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 traded near session lows 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.
In Asia, regional currencies were mostly beholden to moves
in major global units though investors are watching for any
developments in China-U.S. trade negotiations.
The dollar was hemmed in against other major currencies as
expectations for a U.S. Federal Reserve rate cut next week sent
Treasury yields lower.
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 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 $1.2477, within striking
distance of a 27-month low of $1.2382 reached last week.
Sterling has fallen 3.5% 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 euro EUR=EBS held steady at $1.1208 as traders awaited
the ECB's policy meeting and Draghi's comments at a press
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 was little changed at 107.91 yen JPY= . The
dollar index .DXY was marginally higher at 97.314.
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.