October 5, 2017 / 3:58 PM / a year ago

Political worries prod sterling to 4-week low against stronger dollar

* Graphic: sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Fanny Potkin

LONDON, Oct 5 (Reuters) - Britain’s pound skidded almost 1 percent against the dollar on Thursday in what looked likely to be its worst week for a year, as investors worried about a possible leadership battle at the top of the government.

British Prime Minister Theresa May reinforced markets’ doubts about her ability to govern effectively in a poorly-received keynote speech at the annual Conservative party conference on Wednesday.

The conference had been meant to help reassert May’s grip on the party as she tries to revive Brexit talks. But after a speech that was interrupted by coughing fits and a prankster, investors saw the prime minister’s position weakened further, and more vulnerable to leadership challenges.

The pound fell to as low as $1.3121 against a dollar that was strengthening across the board, its weakest since Sept. 8.

“What is happening today with sterling is a mix of a general dollar strength and renewed jitters about the future of the leadership of the Conservative party,” said Stephen Gallo, the European head of FX Strategy at BMO Financial Group.

Against the euro, sterling weakened half a percent to a three-week low of 89.34 pence per euro.

Having two weeks ago reached its highest levels since last year’s Brexit vote on expectations that the Bank of England will hike interest rates in November, sterling has since fallen back almost 4 percent versus the dollar on political uncertainty as well as a run of weak economic data.

For the week, the pound is down more than 2 percent against the dollar - its worst showing since October 2016.

The BoE is still expected to raise rates at its next policy meeting next month, which some analysts say should provide support for the pound.

But ING currency strategist Viraj Patel said political uncertainty could limit any boost for sterling from a rate hike.

“More confusion over the government’s Brexit transition deal strategy ... and ongoing questions over May’s leadership ... may limit the effects of any BoE policy-driven upside in the near-term,” Patel said.

The pound was also knocked on Wednesday by comments from ratings agency Standard & Poor’s, which said it was “a bit sceptical” that Britain’s economy needed an interest rate increase soon, and that hawkish comments from the BoE were designed to push up sterling and cool inflation.

“The immediate problem facing (BoE Governor) Carney is that if credibility dictates that the BoE must now raise rates in November, it risks compounding the present slowdown just as the Brexit negotiations reach a critical stage – thereby raising the prospect of a reversal of policy at some point,” wrote BNY Mellon currency strategists in a note to clients. (Reporting by Fanny Potkin and Jemima Kelly; Editing by Toby Chopra)

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