Sterling drops near 31-year low, dollar firms on U.S. data

NEW YORK (Reuters) - Sterling fell on Monday near a 31-year low against the dollar and to a three-year low versus the euro after a March deadline was set for the start of the formal process that will split Britain from the European Union.

The dollar strengthened against a basket of currencies on a private report that showed the U.S. manufacturing sector returned to expansion territory in September.

Among emerging markets, the Colombia peso tumbled as much as 3 percent against the greenback after voters on Sunday rejected a peace deal with Marxist FARC rebels, raising worries about the nation's credit ratings and ability to embark on tax reforms.

In Britain, Prime Minister Theresa May told her Conservative party's annual conference that she was determined to move on with Brexit and win the "right deal" in an effort to ease fears inside her party that she may delay the split with the EU.

"That caught the market by surprise with some people still hoping Brexit won't happen," said Mazen Issa, senior FX strategist at TD Securities in New York.

May's Brexit comments came after the pound posted its worst run of quarterly losses since 1984.

The pound had dropped more than 1 percent against the dollar to as low as $1.2818 before trimming losses in late U.S. trading. It was briefly less than half a cent away from the 31-year low it reached in early July, shortly after the June 23 vote to leave the EU. It was last down 0.9 percent at $1.2863.

Sterling also shed 0.7 percent against the euro at 87.18 pence after it hit 87.48 pence , its weakest since August 2013.

DOLLAR BOUNCES

The greenback enjoyed a modest rise in light trading as some European and Asian markets were closed for holidays.

The dollar index was up 0.25 percent at 95.701 after the Institute for Supply Management said its barometer on U.S. factory activity rose to 51.5 in September, above the 49.4 in August and beating forecasts among economists polled by Reuters.

A reading above 50 indicates the manufacturing sector is growing.

While the overall ISM reading on factory activity was encouraging, it was not enough to raise expectations the U.S. economy is picking up steam.

"It's not runaway support for the dollar," TD's Issa said.

Meanwhile, the Colombian peso tumbled to its weakest level against the dollar in two weeks after Sunday's referendum rejected a peace deal between the government and FARC guerrillas.

Any renegotiated agreement now seems to depend on whether the FARC could accept some tougher sanctions against them.

The Colombian peso was last down 1.7 percent at 2,931 to the dollar as Sunday's surprise vote stoked worries about a lowering of the country's credit rating.

“I think the market will have to price in that higher probability of a downgrade, so I think there is some downside risk in the very short term to Colombian assets,” said Jim Barrineau, Co-head Emerging Market Debt at Schroders in New York.

Currency bid prices at 2:34PM (1834 GMT)

(Additional reporting by Dion Rabouin in New York; Jemima Kelly in London; Tokyo markets team; Editing by Larry King and Meredith Mazzilli)