FOREX-Sterling's Brexit rally pauses, yuan falls on Hong Kong worries

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Britain, EU rushing to agree Brexit terms
* Sterling loses gains in Asia
* HK risks becoming new flashpoint in U.S.-China relations
* Markets still digesting U.S.-China trade disappointment

By Stanley White
TOKYO, Oct 16 (Reuters) - The pound pulled back from its
highest level in almost five months versus the dollar on
Wednesday, erasing some of the rally sparked by signs Britain is
closing in on a deal to leave the European Union.
Sterling also pulled back from its highest in five months
against the euro as investors took profit and prepared for a
make-or-break summit between Britain and the EU on Thursday and
Friday.
In Asia, investor focus is back on U.S.-China ties with the
yuan falling after Beijing rebuked a new U.S. legislation that
takes a hard line against the crackdown on pro-democracy
protests in Hong Kong. In global currency markets, traders are still awaiting the
outcome of last-ditch talks that dragged on late into Tuesday
night to see whether Britain and the EU can draft an agreement
on Brexit before the summit.
Reports the two sides were approaching an agreement boosted
sterling overnight, though traders said the currency could swing
wildly because it is still unclear if Britain can avoid
postponing its departure beyond Oct. 31.
"Even if the two sides can agree something, it is unclear if
they can stick with the exit deadline," said Yukio Ishizuki,
foreign exchange strategist at Daiwa Securities in Tokyo.
"Whether Britain's parliament will approve whatever has been
agreed is another big uncertainty. Sterling had a good run-up,
but some investors are lightening their positions."
The pound GBP=D3 fell 0.27% to $1.2756, pulling back from
a five-month high of $1.2800 reached on Tuesday.
Against the euro EURGBP=D3 , the British currency fell
around 0.2% to 86.48 pence. On Tuesday, sterling hit 86.25 pence
per euro, the strongest since May 10.
The pound on Tuesday jumped after Bloomberg News reported
that negotiators hoped an agreement would be reached by midnight
on Tuesday in Europe, but a lack of news in Asia about the
results of the talks helped push the currency lower, traders
said.
Without a Brexit deal, trade from Britain that previously
flowed unhindered across the EU's single market would be subject
to customs tariffs and safety inspections, which many fear would
cause economic turmoil.
In Asia, the fresh U.S.-China strains over Hong Kong pushed
the safe-haven yen higher, helping it claw back earlier losses,
as worries about relations between the economic superpowers and
disappointment with efforts to end their trade war marred
sentiment.
In the onshore market, the yuan CNY=CFXS fell around 0.23%
to 7.0978 per dollar. In the offshore market, the yuan CNH=D3
was off more than 0.2% to 7.0913 versus the dollar.
A bruising trade war between the United States and China
that has dragged on for more than a year has already placed
incredible strain on relations between the two countries.
Hong Kong has been rocked by months of often violent
protests against China's rule of the former British colony.
Any signs of support from U.S. lawmakers for the protest
movement is likely to draw Beijing's ire and make a resolution
to the trade war less likely. Reports of a "Phase 1" trade deal between the United States
and China last week initially cheered markets but the dearth
of details around the agreement has since curbed any
enthusiasm.
The yen JPY=EBS rose slightly to 108.70 per dollar,
pulling away from a two-month low. The yen also rose around 0.4%
versus the pound GBPJPY= and the Australian dollar AUDJPY= .
The dollar index .DXY against a basket of six currencies
rose slightly to 0.03% to 98.322.