Sterling hits fresh two-month low against dollar

Oct 22 (Reuters) - Sterling hit a fresh 2-month low against the dollar on Tuesday while investors remained focused on the central banks' easing paths and the possible outcome of the U.S. elections.

The U.S. dollar index was just off a 2-1/2-month high on expectations the Federal Reserve will take a measured approach to rate cuts, while the too-close-to-call U.S. election keeps investors on edge.

British public borrowing in the first six months of the tax year came in higher than official forecasts, data showed on Tuesday, underscoring the challenge facing finance minister Rachel Reeves in her first budget next week.

Analysts expected the UK budget to tighten spending, a move that could weaken the economy and lead the BoE to more rate cuts than markets are currently pricing.

Sterling was last down 0.05% at $1.2883, after hitting its lowest since mid-August at $1.2967.

The pound has so far benefited from the Bank of England's cautiously hawkish tone, signalling a more gradual cutting cycle relative to peers, while UK growth was outperforming relative to the euro area.

"We think these forces (rate and growth divergence) will continue to weigh on the (euro/pound) cross also in the coming months," said Kirstine Kundby-Nielsen, analyst at Danske Bank.

"Longer-term, some of these pound tailwinds look set to fade, and we expect not least a more dovish BoE to eventually weigh on sterling."

The BoE's Megan Greene said she still believed the central bank should be cautious about cutting borrowing costs.

Analysts noted that Thursday's release of the UK PMI data could affect market expectations for the BoE's monetary easing path.

Last week, sterling tumbled to its lowest two months after softer-than-expected British inflation.

The single currency rose 0.14% to 83.41 pence per euro.

The repricing of the euro area policy rate outlook, with investors discounting some chances of a 50 basis points rate cut in December, was weighing on the single currency last week.

(Reporting by Stefano Rebaudo; Editing by Alison Williams)