* Yen rises nearly 1 percent on lower U.S. bond yields
* Lead of UK PM May’s Conservatives drops in YouGov poll
* Sterling falters, down 0.6 pct on the day
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Ritvik Carvalho
LONDON, May 26 (Reuters) - The yen rose nearly 1 percent on Friday against the dollar after a dip in Treasury yields hit the U.S. currency, while Britain’s pound hit a three-week low after a poll showed a narrowing lead for the ruling Conservatives before elections next month.
The dollar was slightly higher against a basket of peers, while the euro reversed modest gains earlier in the day.
The Japanese yen hit a three-day high, up 0.8 percent to 110.88 per dollar. Analysts cited a fall in U.S. Treasury yields since Federal Reserve minutes on Wednesday prompted questions over the pace and extent of interest rate hikes.
“The yen appreciated and continues to correlate more closely with U.S. bond yields. I don’t believe they’ll fall very far but the move could be exacerbated by a number of places having a holiday on Monday,” said Kit Juckes, currency strategist with Societe Generale in London.
“You can get outsized moves (owing to the holiday), and I suspect that yen shorts were a consensus trade last week.”
Investors tend to “square” or offset their long (buy) or sell (short) positions on currencies before major holidays.
Against a basket of six major currencies, the dollar was up less than 0.1 percent to 97.281.
The euro pared gains made earlier in the day and was down 0.2 percent at $1.1192, having touched a 6-1/2 month high of $1.1268 earlier this week.
The common currency has enjoyed a near 3 percent gain this month on factors including an ebb in French political concerns and upbeat euro zone data.
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 the opposition Labour Party had cut the lead of May’s Conservatives to five points.
That pulled the pound over half a percent lower to $1.2837 by the European afternoon, further 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 hardline 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 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.”
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; Editing by Toby Chopra