UKX FTSE 100 Index

By Barbara Kollmeyer, MarketWatch , Suryatapa Bhattacharya and Ryan Vlastelica

Investors also looking ahead to start of Fed meeting

The U.S. dollar strengthened on Tuesday as the British pound fell to its lowest level since January against the buck, a day after U.K. lawmakers set the stage for Brexit talks to begin.

However, market direction could shift in the coming day following the Federal Open Market Committee's two-day meeting, which is scheduled to get under way later Tuesday and is widely expected to result in an interest rate hike.

Against the dollar, the pound dropped to $1.2130 from $1.2219 late Monday in New York, a move of about 0.7%. The pound hasn't been that weak against the dollar since Jan. 17, when it fell to an intraday low of $1.204, according to FactSet Research. With the day's move, the pound is down 2% for the month of March, and 1.8% thus far in 2017.

The U.K. parliament passed the Brexit bill on Monday (http://www.marketwatch.com/story/uk-house-of-commons-reject-amendments-clearing-brexit-obstacle-2017-03-13) (http://www.marketwatch.com/story/uk-house-of-commons-reject-amendments-clearing-brexit-obstacle-2017-03-13), giving Prime Minister Theresa May the ability to begin the formal process of the country's exit from the European Union. She is expected to make a move to begin the two years of negotiations before the end of March.

Read:A EUR60 billion bill and other hurdles for the U.K. in the face of Brexit (http://www.marketwatch.com/story/a-60-billion-bill-and-other-hurdles-for-the-uk-in-the-face-of-brexit-2017-03-13)

But May's triumph was ambushed by Scotland's First Minister Nicola Sturgeon. On Monday, the Scottish leader said she plans to seek approval to hold a second referendum on Scottish independence (http://www.marketwatch.com/story/scottish-first-minister-nicola-sturgeon-confirms-plans-for-independence-vote-2017-03-13) before Brexit happens. The move compounded any concerns the market has regarding Brexit.

"This complicates the task facing the UK government as they have won parliamentary authority to trigger Article 50," said Mihir Kapadia, CEO and Founder of Sun Global Investments. "The lower pound is proving to be good for UK exports but inflation which is already showing signs of a significant revival could be boosted further."

Versus the yen, the pound dropped 0.6% to Yen139.58. Against the euro , the pound dropped 0.6% to EUR1.1395.

Thursday's Bank of England meeting and monetary policy announcement were also a talking point for investors.

Koji Fukaya, chief executive of FPG Securities, said if the Bank of England is seen to be dovish, the pound could weaken against the euro. If the U.K.'s central bank was seen remaining neutral, it could drive further euro strength against the pound in the short term. In short, the currency pair was "very hot," Fukaya said.

Investors are also keeping an eye on Dutch election, to be held Wednesday, which they believe could gauge the risk of a eurozone breakup. The shared currency was supported by the European Central Bank's indication last week that it might not take fresh easing steps, despite caution over the election in the Netherlands.

Read: Who is the 'Dutch Trump' Geert Wilders, and why should investors care? (http://www.marketwatch.com/story/who-is-the-dutch-trump-geert-wilders-and-should-investors-be-worried-about-him-2017-03-10)

"The Dutch election will be one indicator of how the trend in Brexit and (U.S. President Donald) Trump's victory translates to continental Europe," said Shusuke Yamada, FX strategist with Bank of America Merrill Lynch in Tokyo.

Fed ahead

Despite an overnight rise in the U.S. Treasurys rate, the dollar's reaction remained muted to expectations of a rate hike on Wednesday because investors have already priced it in (http://www.marketwatch.com/story/fed-may-not-pull-any-punches-in-policy-statement-2017-03-13), said analysts.

Read: One chart shows how remarkably relaxed investors are about rising interest rates (http://www.marketwatch.com/story/one-chart-shows-how-remarkably-relaxed-investors-are-about-rising-interest-rates-2017-03-13)

The ICE U.S. Dollar Index , which measures the currency against a basket of six major rivals, was up 0.3% to 101.61, largely due to strength against the pound. The WSJ Dollar index, which looks at the buck against a wider set of currencies, rose 0.2% to 91.89.

The euro traded at $1.0632 from $1.0653, a move of about 0.2%. Against the yen , the dollar traded at Yen114.86 from Yen114.88.

Investors are awaiting a Bank of Japan meeting later this week, in addition to any Fed news.

"To reignite the movement in foreign-exchange market, we want to see probably more than just a March hike," said BAML's Yamada.

A shift in the Fed's so-called dot plot this year or in long-term equilibrium interest rate -- meaning if the U.S. central bank indicates four instead of three interest rate increases -- would surprise markets and in that case the dollar-yen pair could be seen breaking above the Yen115-range, which would mean that "Yen115 might become a floor rather than a ceiling," said Yamada. The dot plot is a forecast of the Fed members' projections for future interest rates, which was most recently implying three rate increases for 2017.

-- Kenan Machado and Hiroyuki Kachi contributed to this article.

(END) Dow Jones Newswires

March 14, 2017 08:35 ET (12:35 GMT)

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