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FOREX-Weak factory data knocks dollar as Brexit delay hopes boost pound

Tom Westbrook

* Dollar falls on weaker-than-expected manufacturing data

* Sterling recovers but under pressure amid Brexit chaos

* Plummeting pound: https://tmsnrt.rs/2N6T2JO

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

SINGAPORE, Sept 4 (Reuters) - The dollar pulled back on Wednesday as weak U.S. manufacturing stoked wagers on aggressive policy easing, while the British pound recouped losses in the wake of a parliamentary vote that opened the door for another Brexit delay.

Manufacturing activity in the world's biggest economy contracted for the first time in three years last month, according to the Institute for Supply Management.

That knocked the wind from the greenback and rallied the bond market as investors increased bets on a couple of Federal Reserve rate cuts before Christmas.

A 25-basis-point cut is now fully priced in, while yields on benchmark 10-year Treasuries, which fall when prices rise, dropped to their lowest in two years.

As a result, the greenback gave ground to the yen, the Australian dollar, and the pound. Sterling climbed as high as $1.210 in early Asian trade, helped by the possibility that a no-deal Brexit may yet be averted.

"The expectation that the Fed will come to the rescue has increased," said Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.

"But it's not a capitulation on the dollar. It's just merely stopped the recent rise of the dollar."

Against a basket of currencies the dollar traded slightly lower at 98.944, which was 0.4% below the two-year peak it touched on Tuesday.

The sterling was pushed higher after British lawmakers voted to take control of the parliamentary agenda and scheduled another vote on Wednesday. If the vote is successful, it would force Prime Minister Boris Johnson to seek more time from the European Union and prevent leaving the bloc without a divorce deal.

The prospect of a so-called "hard Brexit" has been a major source of worry for currency markets. The pound had dropped under $1.20 and hit its lowest since a flash crash in October 2016 on Tuesday.

More than three years after the UK voted in a referendum to leave the EU, the Brexit process remains unresolved and a source of major political chaos. Possible outcomes for Britain range from a turbulent "no-deal" exit to abandoning the whole endeavour.

Johnson has said he will now push for a snap election, adding another major source of political uncertainty for sterling.

"We still just can't say what the end game will be," said Yukio Ishizuki, senior strategist at Daiwa Securities.

"Die-hard Brexiteers want a Brexit no matter what while the Remainers are deadly opposed. This is not an issue in which both sides can come halfway for a compromise."

The euro was steady around $1.2087, a recovery from a 28-month low against the dollar that it touched on Tuesday, as investors priced in deeper negative interest rates for longer in the euro zone.

The yen rose to 105.99 per dollar before easing slightly to trade at 105.86 by 0008 GMT.

There were few signs of a breakthrough in U.S. China trade negotiations with President Donald Trump taking to Twitter to warn he would be "tougher" on Beijing in a second term if trade talks dragged on. (Reporting by Tom Westbrook in Singapore and Hideyuki Sano in Tokyo; Editing by Sam Holmes)