June 9, 2017 / 8:08 AM / 2 months ago

FOREX-Pound pummeled by UK election upset, other currencies calm

* British PM May falls short of parliamentary majority

* Pound down 1.6 pct after dropping as much as 2 pct vs dollar

* Movements in dollar, euro and yen limited, Comey taken in stride

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

By Ritvik Carvalho

LONDON, June 9 (Reuters) - Britain's pound took a battering on Friday after Prime Minister Theresa May's Conservative Party lost its parliamentary majority in elections, potentially disrupting Brexit negotiations.

Sterling fell 2 percent to $1.2698 after sliding as much as 2.5 percent to $1.2636 in early European trade, its weakest level since April 18.

May faced calls to quit after her election gamble to win a stronger mandate backfired, leaving no single party with a clear claim to power just 10 days before the start of negotiations on Britain's divorce from the European Union. She is due to make a speech at 0900 GMT.

For a graphic on the poll, see tmsnrt.rs/2q7tC48

"The market wants more clarity now in terms of who is going to be Prime Minister, what form the government is going to take and ultimately how all that feeds through into upcoming Brexit negotiations," said MUFG currency strategist Lee Hardman in London.

"In the near term the increased political uncertainty and the risk of more disorderly Brexit negotiations should enforce pound weakness."

Reactions in other major currencies such as the dollar, euro and yen were limited. They had already largely shrugged off Thursday's testimony by former FBI director James Comey, which had been seen as the week's other big event.

"Other currencies, like dollar/yen, are not reacting much as it is a more domestic affair this time, unlike last year's Brexit vote," said Koji Fukaya, president at FPG Securities in Tokyo.

"The focus for the broader currency market will now shift towards the Federal Reserve's policy meeting next week."

The Fed is widely expected to hike interest rates after it ends a two-day meeting on Wednesday, and the focus is on whether it would leave the door open for further monetary tightening in the months to come.

The U.S. currency was up 0.3 percent at 110.365 yen.

The dollar index against a basket of major currencies was up half a percent at 97.392.

It had retreated to a seven-month low of 96.511 midweek when caution ahead of Comey's testimony and the British election drove U.S. yields to lowest levels since November. But yields have since bounced from the lows as risk aversion ebbed.

The euro extended overnight losses and was 0.2 percent lower at $1.1193, off a seven-month high of $1.1285 touched a week ago on improved growth prospects in Europe and a broadly weaker dollar.

But the common currency was capped after the European Central Bank on Thursday cut its forecasts for inflation and said policymakers had not discussed scaling back its massive bond-buying programme.

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

Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Andrew Heavens

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