* Lead of UK PM May's Conservatives drops in YouGov poll
* Sterling falters, down 0.6 pct on the day
* Norwegian crown, loonie, post modest recovery
* Risk-off sentiment drives yen up 0.5 pct
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Ritvik Carvalho
LONDON, May 26 (Reuters) - Sterling fell to a two-week low on Friday after a poll showed a narrowing lead for British Prime Minister Theresa May over her opposition ahead of elections next month, while commodity-linked currencies inched higher after a recovery in oil prices.
The yen rose to a 3-day high versus the dollar, while the euro also edged higher.
In a sign that Britain's June 8 election could be far more closely contested than previously thought, a YouGov poll published on Thursday showed that the opposition Labour Party had cut the lead of May's Conservatives to five points.
Sterling fell over half a percent to as low as $1.2861 , pulling further away from a May 18 peak of $1.3048, the pound's strongest level since September last year.
The assumption that a landslide election win for May would strengthen her hand over hard-line Brexiteers in her ruling party and allow her to negotiate a smoother departure from the European Union, has given sterling a near 4 percent bump since she announced the election.
That view, however, has been challenged by recent opinion polls.
"We've always been concerned the market is probably buying too much the large majority scenario for the Tory party and sterling is vulnerable in the near term to headwinds," said Kamal Sharma, currency strategist at Bank of America Merrill Lynch in London.
"The move on the opinion polls is not wholly surprising given that we've seen similar dynamics heading into other elections."
Oil-linked currencies such as the Canadian dollar and the Norwegian crown inched higher, aided by a slight recovery in oil prices. Crude tumbled on Thursday, when OPEC and allied producers extended output cuts but disappointed investors betting on longer or larger supply curbs.
The Canadian dollar was last trading up 0.2 percent at C$1.3455 per U.S. dollar, down from a five-week high of C$1.3388 touched on Thursday.
The Norwegian crown rose 0.1 percent to 9.4096 crowns per euro.
Against a basket of six major currencies, the dollar lost 0.2 percent to 97.094, some risk-off sentiment driving the yen half a percent higher to 111.25 yen per dollar.
The greenback had been weighed down after the Federal Reserve's minutes of the May policy meeting released on Wednesday dialled down on some of the more hawkish policy expectations in the market.
The dollar's underlying trend doesn't look very strong, said Satoshi Okagawa, senior global markets analyst at Sumitomo Mitsui Banking Corporation in Singapore.
Okagawa said that one message from the Fed minutes was that the U.S. central bank is likely to take a gradual and flexible approach to reducing its balance sheet.
"That has helped U.S. yields to settle down and has led to weakness in the dollar," he added.
San Francisco Fed President John Williams told Reuters on Thursday that the Fed would release details of its plans for trimming its balance sheet "in coming months", adding that balance sheet trimming should be gradual, and 'fundamentally' on auto-pilot.
The euro rose 0.1 percent to $1.2210, climbing towards a 6-1/2 month high of $1.1268 set this week.
The common currency has enjoyed a bull run this month on factors including an ebb in French political concerns and upbeat euro zone data.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Ritvik Carvalho; additional reporting by Singapore Markets Team