British pound frail after key eurosceptic ministers quit

By Hideyuki Sano and Daniel Leussink

TOKYO (Reuters) - The British pound was frail on Tuesday after the departure of two key eurosceptic ministers raised worries about a "hard Brexit" while the yen retreated against the dollar as investors bid up riskier assets.

Sterling stood at $1.3248 GBP=D4 , having fallen to as low as $1.3189 on Monday, after Prime Minister Theresa May's foreign minister and Brexit negotiator quit in protest at her plans to keep close trade ties with the European Union.

The currency regained some ground after several Conservative lawmakers said May is likely safe from a leadership challenge despite the resignation of Boris Johnson and Brexit minister David Davis.

Still, after two years of wrangling, their departures shatter May's own proclamation of cabinet unity last Friday in what she believed was an agreement on Britain's biggest foreign and trading policy shift in almost half a century.

Simon Derrick, London-based chief currency strategist at BNY Mellon, said the next few weeks could prove decisive, noting that financial markets have a poor track record of pricing in UK political risks, not to mention the 2016 Brexit referendum.

"Current thinking is that May would win a party confidence vote. However, there is a risk that were May to make further compromises in the negotiations with Brussels, more hard line Conservative MPs might be theoretically prepared to abstain or even vote against her in a no confidence vote in Parliament," he said.

Markets still expect it is likely the Bank of England (BOE) will hike rates at its next policy meeting on Aug. 2, but analysts said a full-blown political crisis could dent those expectations.

"Uncertainty is conquering the market at the moment regarding the possibility of a rate hike in August," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.

"If there were some negative comments about a possible rate hike from BOE officials ahead of the August (Monetary Policy Committee meeting), then we will see a big fall in sterling," he said.

Against the euro, the pound hit a four-month low of 89.025 pence per euro on Monday, and last stood at 88.68 (EURGBP=D3).

The dollar's index against a basket of six major currencies (DXY), (=USD) fell to as low as 93.711 on Monday, its lowest since mid-June, and last stood at 94.098.

The dollar was not helped by Friday's data showing U.S. wage growth remained tame despite a tight labor market.

That kept the euro firm, trading at $1.1751 (EUR=), not far from three-week highs of $1.17905 touched on Monday.

The common currency strengthened to one-month high of 1.16565 Swiss franc (EURCHF=) on Monday. Against the yen, it traded at 130.515 yen (EURJPY=), retreating slightly after hitting a seven-week high of 130.57 yen.

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The Japanese currency weakened against the dollar as investors appeared to be putting aside concerns of the trade conflict between the U.S. and China for now.

The dollar changed hands at 111.045 yen , above the 111-yen handle for the first time since last Tuesday.

The Chinese yuan tacked on 0.1 percent in offshore trade to 6.6114 CNH=D3 against the dollar.

"It seems the market has digested the potential negative outcome stemming from the U.S.-China trade war, although I am not sure the market has really priced in the worst scenario," said Mizuho Securities' Yamamoto.

The Australian dollar AUD=D4 inched up 0.2 percent to $0.7479, extending its recovery from $0.7311 touched on Monday last week.

Turkey's lira on Tuesday made up some of the previous day's losses, trading 0.8 percent higher at $4.6954 TRYTOM=D3 .