* Below-par factory activity from China, Japan add to gloom
* Sterling scales $1.33 overnight on Brexit delay bets
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
By Daniel Leussink
TOKYO, Feb 28 (Reuters) - The dollar held above a three-week low on Thursday as investors remained cautious amid uncertainty over the progress in U.S.-China trade talks, while sterling rallied on bets that the chance of a no-deal Brexit was shrinking.
Monthly gauges of factory activity in both China and Japan came in weaker than expected on Thursday, offering fresh evidence that the seven-month U.S.-Sino trade dispute was taking a toll on economic growth around the world. dollar mostly held onto gains booked during the previous session after U.S. Trade Representative Robert Lighthizer told a Congressional hearing it was too early to predict an outcome in U.S.-China trade negotiations. greenback had also found support on a flare-up in tensions between Pakistan and India, sending investors out of riskier markets and into safer assets. are probably putting on the safe trade, which is being long dollars. On one hand, it's not very exciting but on the other hand, investors do need to produce yield," said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:STT) Bank.
"It's probably not performing the way that they need it to do," he said. "We've probably seen some interest in emerging markets selectively (to get yield)."
The dollar index against a basket of six major rivals last traded a shade lower at 96.085 .DXY .
It had edged up nearly 0.2 percent for the first time in four days overnight, after brushing a three-week low of 95.883 earlier in that session.
Sterling held onto gains after rallying to its highest levels in seven months on Wednesday as traders ramped up bets that a no-deal Brexit was less likely and that Britain's departure from the European Union would be delayed.
British Prime Minister Theresa May on Tuesday had offered lawmakers the chance to vote in two weeks for a no-deal Brexit or to delay Britain's exit from the E.U. if her attempt to ratify an agreement fails. push and pull factors for sterling seem set for the short term in that delays and soft Brexit options will lead to strength, with a hard-deal Brexit leading to significant pull backs," noted Nick Twidale, chief operating officer at Rakuten Securities Australia in Sydney.
"The E.U. is pushing for a lengthy delay," Twidale said in a note. "This probably reflects the fact that the economic data out of Europe has been very poor in recent months and political tensions are rising in member states."
The pound was flat at $1.3311 GBP=D4 . It had climbed as high as $1.3351 overnight, ending the session almost half a percent higher and moving further above its 200-day moving average.
Sterling has risen about 1.5 percent against the dollar so far this month, adding to a 2.8-percent gain booked in January.
The Australian dollar, widely seen as a liquid proxy for China risk because of Australia's dependence on Chinese demand for its exports, struggled after China's official manufacturing gauge fell more than expected to a three-year low.
The Aussie was last at $0.7140 AUD=D4 , after shedding about two-thirds of a percent during the previous session.
India and Pakistan both said they shot down each other's fighter jets on Wednesday, with Pakistan capturing an Indian pilot a day after Indian warplanes struck inside Pakistan for the first time since a 1971 war, prompting world powers to urge restraint.
"You're talking about two nuclear powers...The danger factor of this escalating is definitely something," State's Wakabayashi said.
"India, again, is a very important emerging market. We have elections coming up. There is a lot going on there that could have a ripple effect if stability is in question."
The Japanese yen, seen by investors as a safe haven in times of market stress and geopolitical tensions, was up one tenth of a percent on the day at 110.86 yen per dollar JPY= .
It had briefly risen to a near two-week high of 110.355 yen overnight before giving up most of its gains.
The euro was slightly higher at $1.1379 EUR= .
(Editing by Kim Coghill and Sam Holmes)