Wires

Sterling sags as traders doubt Johnson Brexit offer will lead to deal

Olga Cotaga

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

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

LONDON, Oct 2 (Reuters) - Sterling was weighed down on Wednesday by fears that Prime Minister Boris Johnson's proposal to replace the Irish border "backstop" will not lead to a Brexit separation agreement with the European Union.

Johnson is expected to disclose his final Brexit offer to the EU later in the day and to make clear that if Brussels does not engage with the proposal, Britain will not negotiate further and will leave on Oct. 31.

A media report in the Telegraph newspaper on Tuesday said Johnson was planning to propose leaving Northern Ireland in large parts of the EU single market until at least 2025, but take the province out of the EU customs union along with the rest of the United Kingdom.

The proposal would be aimed at replacing the so-called backstop -- an insurance policy to prevent the return of a hard border on the island of Ireland -- that has become the biggest hurdle to securing an agreement with Brussels.

Irish Foreign Minister Simon Coveney said the reported proposal would not provide the basis for a deal, adding that the proposal was "concerning".

Investors shared his scepticism, keeping the pound down 0.3% at $1.2276. Against the euro, sterling was also lower by 0.1% at 88.95 pence.

"I dont sense an agreement between the two sides," said Neil Jones, head of European hedge fund sales at Mizuho. Therefore, "well see a lower sterling" going forward.

With less than a month until Britain is due to leave the EU, it remains unclear how Britain will carry out its biggest trade and foreign policy shift in more than 40 years. It might leave with a deal, without one or not leave at all.

The multiple possibilities have left investors unwilling to trade the pound, going instead to the derivatives market to trade pound volatility.

"There is quite a lot of staying away from sterling," Jones said, adding he would be "looking to buy sterling volatility on dips."

(Reporting by Olga Cotaga, editing by Larry King)