While the Federal Open Market Committee (FOMC) is widely expected to vote to cut interest rates following this week's meeting, the continued momentum in the USA economy suggests that there will be little need for further cuts down the road.
While US money market futures price in a total of nearly 75 basis points of cuts by the end of the year to 1.5-1.75 per cent, that still leaves the US dollar with the highest interest rates among major currencies.
Anyway, about three quarters of market participants still expect a 0.25 percent rate cut on Wednesday.
The dollar clung to a two-month high against a basket of currencies in Asia on Monday after better-than-expected US GDP data last week enhanced its yield attraction against rival currencies.
The pound dropped to €1.0981 (euro) by 4pm, according to Pound Sterling Live, which is the lowest figure since €1.0793 of August 2017.
Senior ministers said on Sunday the British government is working on the assumption that the European Union will not renegotiate its Brexit deal and is ramping up preparations to leave the bloc on October 31 without an agreement.
The pound dropped to $1.2335, a level last touched in March 2017.
In the meantime, over in the United Kingdom (UK) the British pound tumbled to a 28-month low against the dollar to below USD $1.23 per British pound when Prime Minister Boris Johnson's government said it now assumed there would be a "No-deal Brexit" because a "stubborn" European Union was refusing to "renegotiate" the divorce agreement that was negotiated between Prime Minister Theresa May and the European Union (EU), but that never made it "through" the UK parliament.
"It is just the ongoing hardening of the Brexit line", said John Hardy, Saxo Bank's head of FX strategy. "There is so much optionality around it and if there is going to be a cliff edge, people will want to position for it".
"The GDP figures were a bit stronger than expected, putting a dent to the view of the USA entering a long easing cycle".
Data out of the United States on Friday showed that the country's gross domestic product (GDP) expanded by 2.5 percent in 2018, not at a rate above 3 percent as President Trump originally claimed. The report highlighted that US economic growth slowed in the second quarter of 2019, growing at a rate of only 2.1 percent, compared to the growth of 3.1 percent that was achieved in the first quarter of the year.
The U.S. currency also got a minor boost from White House economic adviser Larry Kudlow, who said on Friday that the Trump administration has "ruled out" intervening in markets to lower the U.S. dollar's value.
The Japanese yen weakened 0.12% versus the greenback at 108.82 per dollar.
Against the yen, the USA dollar traded at 108.62 yen, down slightly from late U.S. levels on Friday, when it had risen to a two-week peak of 108.83 yen.
The Fed isn't the only central bank in focus this week however, as markets await the Bank of England's (BoE) own policy decision on Thursday.
In bonds, euro zone bond yields dipped as jittery investors eyed more U.S.
USA and Chinese trade negotiators meet in Shanghai for their first in-person talks since a G20 truce last month, but expectations are low for a breakthrough. It is their first face-to-face meeting since U.S. President Donald Trump and Chinese President Xi Jinping agreed to revive talks late last month.
China's foreign ministry spokeswoman said on Monday Beijing hoped Washington would stick to its commitment to create positive conditions for the trade talks this week.