July 29, 2019 / 3:40 PM / a month ago

GLOBAL MARKETS-Sterling tumbles on hard Brexit worries; stocks slip

(Updates with U.S. market; changes byline, dateline from previous LONDON)

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

* Dollar index hits 2-month high

By Rodrigo Campos

NEW YORK, July 29 (Reuters) - The British pound on Monday touched its lowest against the dollar since early 2017 after Prime Minister Boris Johnson's government said it now assumed there would be a hard divorce from the EU, while stocks dipped globally after last week touching their highest in five months.

The dollar index edged up and touched its highest since May 31 as markets counted down to a likely cut in U.S. interest rates this week, with much riding on whether the Federal Reserve signals more cuts will follow.

Sterling fell to a 28-month low of $1.2213 as Johnson's cabinet prepared the ground for a "no-deal" British exit from the European Union, which many investors say would tip Britain into a recession and inject unwanted uncertainty into financial markets.

The pound was last trading at $1.2216, down 1.32% on the day.

"Political risk is finally getting priced. There is a realization the market had not fully priced the increased chances of a no-deal Brexit," said Claire Dissaux, head of global economics and strategy at Millenium Global Investments.

The dollar index rose 0.16%, with the euro up 0.03% to $1.1128.

The Japanese yen weakened 0.20% versus the greenback at 108.91 per dollar.

A stronger-than-expected U.S. gross domestic product report on Friday lead some investors to doubt whether the Fed will continue easing this year after its Wednesday meeting.

Interest rate futures are fully priced for a quarter-point rate cut from the Fed, with a 1-in-4 chance of a half-point move.

On Wall Street, tech stocks weighed the most on the S&P 500 in the run-up to the sector's earnings reports, while the Fed remained as the main market catalyst.

"The key question facing investors now is whether the Fed can get away with a small number of insurance cuts or whether it will be pushed towards a more fundamental loosening of policy," Neil Shearing, group chief economist at Capital Economics, said in a note.

The Dow Jones Industrial Average rose 71.48 points, or 0.26%, to 27,263.93, the S&P 500 lost 5.43 points, or 0.18%, to 3,020.43 and the Nasdaq Composite dropped 59.53 points, or 0.71%, to 8,270.68.

The pan-European STOXX 600 index rose 0.14% and MSCI's gauge of stocks across the globe shed 0.19%.

Emerging market stocks lost 0.43%. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.57% lower, while Japan's Nikkei lost 0.19%.

Investors were also keeping an eye on U.S.-China trade talks. U.S. and Chinese negotiators meet in Shanghai this week for their first in-person talks since a G20 truce last month, but expectations for a breakthrough are low.

Oil futures zigzagged in and out of positive territory, whipsawed by Fed expectations and the reaction to talks between Iran and some signatories of its nuclear agreement over the weekend.

U.S. crude rose 0.27% to $56.35 per barrel and Brent was last at $63.39, up 0.03% on the day.

U.S. Treasury yields were lower across the board in line with most major sovereign debt markets amid global economic uncertainty, with investors focused on the widely expected interest rate cut by the Fed later this week.

People say the Fed could go 50 basis points, but I think that's not going to happen," said Stan Shipley, fixed income strategist at Evercore ISI in New York. "The question is what they are going to say about future cuts."

Benchmark 10-year notes last rose 5/32 in price to yield 2.065%, from 2.081% late on Friday.

The 30-year bond last rose 5/32 in price to yield 2.5943%, from 2.601% late on Friday. Spot gold added 0.1% to $1,418.99 an ounce. U.S. gold futures fell 0.04% to $1,418.70 an ounce.

Copper rose 0.80% to $6,011.00 a tonne.

Reporting by Rodrigo Campos; additional reporting by Olga Cotaga in London and Kate Duguid & Gertrude Chavez-Dreyfuss in New York Editing by Alistair Bell

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