May 31, 2017 / 5:07 AM / 4 months ago

FOREX-Sterling drops on poll showing risk of hung UK parliament

* Dollar takes back lost ground vs perceived safe-haven yen

* Euro under pressure as investors trim long positions

By Hideyuki Sano

TOKYO, May 31 (Reuters) - The British pound dropped on Wednesday after a new poll found that British Prime Minister Theresa May’s Conservative Party risks falling short of an overall majority in the June 8 national election.

The pound was down 0.3 percent at $1.2816 after falling as low as $1.2791 earlier, approaching a one-month low of $1.2775 touched on Friday. It also slipped to a low of 0.8738 pound per euro, near Friday’s eight-week low of 0.8750.

New constituency-by-constituency modelling by YouGov showed the Conservative Party might lose 20 of the 330 seats it holds while the opposition Labour Party could gain nearly 30 seats, The Times said.

The news came after a string of opinion polls show a narrowing lead for May’s Conservatives, shaking the confidence among investors that she would easily win a majority in the election.

“The narrowing in the polls has clearly dented sterling’s performance and continues to weigh on the currency, and is probably likely to do so in the near term,” said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

The dollar touched a 12-day low against the safe-haven yen overnight as investors turned cautious amid political worries in Europe as well as weaker stock and commodity markets after a long U.S. holiday weekend, but then it recouped its losses.

The greenback, which fell to 110.665 yen on Tuesday, last traded up 0.2 percent at 111.05 yen. It continued to remain caged in a relatively narrow range between last week’s high of 112.13 and a low of 110.24 on May 18.

Investors continued to fret that investigations into President Donald Trump’s ties with Russia could hamper his administration’s progress on tax cuts and other promised stimulus measures, concerns which has been undermining the dollar in recent weeks.

The dollar index edged up 0.1 percent to 97.420, holding well above last week’s 6-1/2-month low of 96.797.

The euro inched 0.1 percent lower to $1.1175, pressured by fears of an early election in Italy and a softer-than-expected inflation reading in Germany. The latter sent German government bond yields to their lowest level in more than a month.

Italy’s 5-Star Movement voted over the weekend in favour of a proportional electoral system, raising the chances of an unprecedented autumn parliamentary election.

Investors continued to await clues from the European Central Bank that it would wind down its bond purchase programme this autumn as planned in light of indications that the eurozone economy is improving. But ECB President Mario Draghi on Monday repeated the need for “substantial” stimulus.

“The main scenario is that the ECB will eventually taper its stimulus, although Draghi has given no hints about this as of now, and that is weighing on the euro,” said Ayako Sera, senior market economist at Sumitomo Mitsui Trust.

In the United States, consumer spending recorded its biggest increase in four months in April and monthly inflation rebounded, pointing to firming domestic demand that could allow the Federal Reserve to raise interest rates in June.

But some market participants say signs of softness in some economic data have raised questions about whether the Fed can hike interest rates two more times this year and begin shrinking its balance sheet. (Additional reporting by Lisa Twaronite; Editing by Eric Meijer and Richard Borsuk)

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