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Sterling sags to 31-year low; dollar near 2-week high

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The sterling stumbled to its lowest level against the dollar in 31 years on fears over the fallout of Britain's looming exit from the European Union, while the greenback strengthened on upbeat economic data and bets on a year-end U.S. interest rate increase.

The pound has fallen 1.8 percent after British Prime Minister Theresa May's announcement on Sunday that the formal process to take the nation out of the EU would start by the end of March.

This is where dollar/yen is headed

"Everything people are hearing from the UK is not positive for its currency," said Paresh Upadhyaya, director of currency strategy at Pioneer Investments in Boston.

Many in the market worry that the British government's stance points to a "hard Brexit," in which Britain splits entirely from the single market in favor of retaining control over immigration, which could drive an exodus of banks from London.

The sterling was down 0.7 percent at $1.2752 after falling earlier on Tuesday to $1.2735, its weakest since June 1985. It has declined 15 percent since Britain's June 23 referendum on EU membership.

Dollar/yen likely to remain at 100 levels: ABN AMRO

The pound was down 0.2 percent at 87.42 pence per euro after setting a three-year low against the single currency.

The dollar was broadly stronger against the pound, euro and four other major currencies. It was up 0.8 percent to a 13-day high against this basket of currencies, helped by an increase in risk sentiment and an upbeat survey of the U.S. manufacturing sector that drove investors to raise their bets on a rate hike by the end of the year.

On Tuesday, Richmond Federal Reserve President Jeffrey Lacker said there was a strong case for raising interest rates and that borrowing costs might need to rise significantly to keep inflation under control.

U.S. interest rates futures suggested traders saw a 63 percent chance the Fed would raise rates at its Dec. 13-14 meeting, up a touch from late on Monday, according to CME Group's FedWatch progam.

"Good data increases the chances of interest rate rises," said Commerzbank currency strategist Esther Reichelt in Frankfurt, "and when the dollar appreciates, people are jumping on that train."

The dollar jumped more than 1 percent to a 13-day high of 102.83 yen on Tuesday on demand tied to rising oil prices and reduced jitters over the stability of Deutsche Bank

The Australian dollar showed little reaction to the Reserve Bank of Australia's widely expected decision to stand pat on monetary policy, falling 0.4 percent to $0.7642.