January 16, 2019 / 12:22 PM / 3 months ago

FOREX-Dollar up on bleak EU outlook, pound bolstered by hopes of soft Brexit

* Poor German data, Draghi warning, weighs on single currency

* UK PM May loses historic vote, no-confidence motion called

* Second referendum hopes boosts pound against euro

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh (Recasts; updates prices; adds analyst quote; changes byline, changes dateline from LONDON to NEW YORK)

By Kate Duguid

NEW YORK, Jan 16 (Reuters) - The dollar rose against the euro on Wednesday as the single currency was pushed lower by worries about the euro zone economy, while sterling was strong ahead of a no-confidence vote in British Prime Minister Theresa May's government.

The euro was down 0.13 percent against the dollar, last at $1.140, after being compressed earlier in the session to a 12-day trough of $1.138. Earlier this week, data showed Germany barely escaped a recession in the second half of 2018 and European Central Bank chief Mario Draghi warned on Tuesday the euro zone economy was weaker than anticipated.

"The dimmer outlook was acknowledged by outgoing ECB President Mario Draghi, a cautious tone that gave added traction to the euro’s slide from three-month highs," said Joe Manimbo, senior market analyst at Western Union.

"Add it all up and it seems increasingly less likely that the ECB would be able to normalize monetary policy later this year."

In Britain, May is widely expected to retain power in the confidence motion at 1900 GMT on Wednesday, called by opposition Labour Party leader Jeremy Corbyn after a crushing defeat of the prime minister's Brexit divorce deal in parliament on Tuesday. Defeat of the deal left the country's withdrawal from the European Union in disarray just 10 weeks before it is due to leave.

Although the pound had sunk by more than 1 percent against the dollar early on Tuesday, it rallied after the parliamentary vote on the deal as investors saw the defeat as forcing Britain to pursue different options regarding the EU.

"One thing seems clear - this deal they voted on is now dead, I doubt they can make a few tweaks and salvage it," said Richard Falkenhall, a senior FX strategist at SEB.

"You have to look at alternatives to them: there is no support in parliament for a no-deal Brexit so you end with a softer Brexit, or maybe even a second referendum," he said.

Adam Cole, chief currency strategist at RBC, added that if the Labour Party lost the confidence vote as expected, it could switch its focus to a second referendum on EU membership.

As a consequence, the single currency fell as much as 0.3 percent against the pound in early trade, hitting a seven-week low of 88.44 pence, and was trading at around 88.55 pence by 1524 GMT, down 0.21 percent on the day.

The dollar eased 0.17 percent to 108.83 yen after advancing 0.5 percent against its Japanese peer overnight, amid a further ebb in risk aversion with U.S. stocks posting strong gains. (Reporting by Kate Duguid and Abhinav Ramnarayan Editing by Frances Kerry)

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