UPDATE 2-Dollar's gains push pound towards three-month lows

Sterling fell on Monday as rising fears about the economic impact of the spreading coronavirus encouraged investors to seek safety in the U.S. dollar.

The British pound dropped as investors scrambled out of assets deemed riskier in favor of the dollar. Most analysts see the U.S. economy as relatively well-shielded should the coronavirus hurt global growth significantly. The pound's weakness on Monday was largely a dollar strength story, with hedge funds turning cautiously optimistic on sterling in recent weeks. The latest figures show funds have ramped up long positions in the pound to near two-year highs.

Those net positions look large in relation to recent market moves, but they remain a long way from 2018 highs, suggesting there is more room for gains. The pound has been supported in recent weeks by better-than-expected economic data and growing expectations that the new UK finance minister will announce more spending at next month's budget.

But those gains have been capped by broad dollar strength and worries about Britain's trade talks with the European Union. "A quiet week in terms of data releases is going to leave space to the other two key drivers of GBP: UK-EU trade negotiations and hints about the content of the upcoming UK budget," ING analysts said in a research note.

"We suspect both will hardly come to the support of the pound, as the negotiations may enter an even more confrontational phase and the government is unlikely to endorse the market's high fiscal hopes." On Monday, the pound fell 0.2% to $1.2930, not far from the three-month low of $1.2849 it hit last week. Versus the euro, the pound weakened 0.4% to 84.02 pence.