Sterling edges higher against dollar, tariffs in focus

By Yadarisa Shabong

(Reuters) - The British pound edged higher against the U.S. dollar on Tuesday as traders weighed the implication of U.S. President Donald Trump's tariffs on Canada, Mexico and China following recent data suggesting a slowdown in the American economy.

Sterling rose to $1.2741, a near three-month high, and was last up 0.18%. It rallied 0.97% on Monday as the U.S. dollar fell on weak data and European markets strengthened after the continent's leaders drew up a Ukraine peace plan to present to Washington.

"Sentiment has... been helped by the pound falling off investors' immediate concerns, with tariff-talk and Russia/Ukraine dominating market thinking," said Kamal Sharma, senior FX strategist at Bank of America.

The dollar extended the previous day's sharp decline in the wake of weak U.S. manufacturing data on Monday that reflected corporate concerns about tariffs and mirrored declines in other sentiment measures.

The dollar index was last down 0.36% at 106.16, around its lowest since mid-December.

Trump's 25% tariffs on goods from Mexico and Canada came into force on Tuesday at 0501 GMT, along with a doubling of duties on Chinese goods to 20%.

Canada and Mexico are poised to retaliate, while China has already hit back with additional tariffs of its own against U.S. imports.

Economists expect Trump's protectionist measures to weigh less on the pound because Britain has a more balanced trade position with the United States, helping boost the pound against the euro in recent weeks.

The euro rose 0.15% against the pound to 82.69 pence after ticking slightly higher on Monday, but remained close to its weakest since mid-December.

Investors are focused European leaders' efforts to boost military spending and provide alternative support for Ukraine.

Trump has paused military aid to Ukraine following his public clash with President Volodymyr Zelenskiy last week, a White House official said, deepening the fissure that has opened between the one-time allies.

A rise in European government bond yields to account for the extra borrowing and spending has helped boost sterling and the euro against the dollar. Yields move inversely to prices.

British finance minister Rachel Reeves is aiming to speed up the procurement of defence equipment, as Britain plans to increase military spending following Trump's call for Europe to do more to protect itself.

(Reporting by Yadarisa Shabong; Additional reporting by Harry Robertson; Editing by Christina Fincher)