FOREX-Sterling soft, dollar drifts lower as trade hopes fade

* Pound hits one-month low
* Dollar drifts lower as hopes for trade breakthrough fade
* Offshore yuan sits by one-month low
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Tom Westbrook
SINGAPORE, Oct 9 (Reuters) - The British pound nursed losses
on Wednesday, after hitting a one-month low on reports that
Brexit talks between Britain and the European Union were close
to breaking down, while the dollar weakened slightly on rising
trade tensions.
In a telephone call on Tuesday, German Chancellor Angela
Merkel told British Prime Minister Boris Johnson that a deal was
"overwhelmingly unlikely," a Downing Street source said.
That leaves the outcome on Oct. 31, when Britain is due to
quit the EU, deeply uncertain, and the pound GBP= dropped half
a percent to its lowest since early September. It recouped a
fraction of the fall in Asian trade to hold at $1.2217.
The dollar, meanwhile, gave up some ground gained overnight
as the U.S. imposition of visa restrictions on Chinese officials
over the treatment of Muslim minorities threatened to derail
already delicate trade negotiations. The move, together with the blacklisting of Chinese firms
over the same issue, cast a pall over Sino-U.S. talks in
Washington, sending investors to safety.
"The tensions will persist through to the year-end at
least," said Westpac analyst Imre Speizer in Auckland, who is
not expecting the talks to deliver a breakthrough deal.
"It'll be volatile good news, bad news, repeat for the rest
of the year, but overall a negative tone."
The safe-haven Japanese yen JPY= edged higher, with the
dollar buying 107.00 yen.
In other markets, stocks tumbled and bond yields fell.
Safe-haven flows had also supported the dollar overnight,
along with comments from Federal Reserve Chairman Jerome Powell,
which were interpreted as suggesting further rate cuts later in
October were not a done deal.
On Wednesday, against a basket of currencies the dollar
.DXY was slightly softer at 99.126, while it fell marginally
against the trade-exposed Australian and New Zealand dollars.
The Aussie traded at $0.6731 AUD=D3 and the kiwi NZD=D3
at $0.6304.
The euro EUR= was steady at $1.0957 as Brexit jitters
stalled its gradual recovery from a 2-1/2-year low hit last
week.
U.S. and Chinese trade deputies are meeting in Washington
ahead of high-level talks involving Chinese Vice Premier Liu He,
U.S. Trade Representative Robert Lighthizer and Treasury
Secretary Steven Mnuchin on Thursday.
But prospects for progress appear to be dimming as tensions
rise. A Chinese diplomat told Reuters that China wanted a deal,
but it cannot be a "zero-sum game".
The Trump administration, meanwhile, is moving ahead with
discussions around restrictions on capital flows into China,
Bloomberg reported on Tuesday, citing people familiar with the
matter.
"The relationship between China and the U.S. continues to
deteriorate," said Michael McCarthy, chief market strategist at
broker CMC Markets in Sydney.
"Hopes for progress at the Washington meeting of top
negotiators on Thursday night fell with risk assets."
The Chinese yuan CNH= , the most sensitive currency to the
trade talks, had dropped to a one-month low overnight and was
steady near that level at 7.1600 per dollar in offshore trade.