"The yen will now have a greater safe-haven pull than the dollar if equities witness a further correction".
In volatile trading, sterling fell to a 1-1/2 week low of $1.2827 as negative headlines over the last 48 hours punctured growing optimism last week that an agreement between Britain and the European Commission was imminent. The shared currency last bought $1.1241, down from 1.1336 late Friday in NY.
Prime Minister Theresa May's spokesman punctured earlier investor optimism over progress on a Brexit deal, denying a Financial Times report, citing European Union's Brexit negotiator Michel Barnier as saying the main elements of a deal were ready and could be presented to the United Kingdom cabinet as soon as Tuesday. May's Caand Leslie Adlerbinet will meet on Wednesday on the Brexit draft. The euro had hit a six and a half month low versus sterling of 0.8653 yesterday.
Meanwhile, Sterling is seeing heavy losses against most of the other majors this morning.More news: Rob Kardashian Files to Lower Child Support Payments to Blac Chyna
MSCI's gauge of stocks across the globe shed 0.12 percent.
The U.S. dollar surged on Monday to its highest point in 16 months against a basket of currencies and world stocks fell broadly amid concern about political risks in Europe, while U.S. and European technology shares were hammered.
Although movement in pound euro is more subdued as the euro's gains are capped amid a standoff between Rome and Brussels over Italy's controversial draft budget.
Against the euro, the pound is up 0.12 per cent. Earlier on Tuesday it touched 86.82 pence, which was the lowest level since April 26.More news: USA grants Iraq 45-day waiver over Iran sanctions
Earlier, U.S. stocks had risen after White House Economic Adviser Larry Kudlow said Washington had resumed trade talks with China and characterized the development as "very positive".
Sterling's losses against the euro were contained thanks to a dollar rally which lifted the USA currency against every other rival, but the pound's drop on Monday has wiped out almost two weeks of gains.
In contrast to the latest news on Brexit, Italy's budget proposals remain a drag on the euro.
The Italian budget issue continues to keep a lid on upside in the common currency, as the Italian government has until Tuesday to resubmit its budget plans and it doesn't appear that the government will rein back its spending plans, said MUFG.More news: Finland to probe reports of Russian Federation disrupting Global Positioning System during North Atlantic Treaty Organisation drill
The tension between Rome and Brussels has raised fears about Italy's membership in the euro zone. Economists in a Reuters poll forecast it would hold steady at 4 percent.