Turbulence surrounding the leadership of British Prime Minister Tony Blair and uncertainty over British interest rate prospects hit sterling on Wednesday, sending it to a two-week lows against the dollar and the euro.
Sterling has now given up a large part of its gains from last week, as a mixed bag of economic data shook investors' conviction that the Bank of England would raise interest rates in November - a factor that gave the pound a lift last week.
Markets were keeping a sharp eye on developments on the political front, as opposition grew within the government to Blair's leadership. One junior government minister and six aides quit on Wednesday after media reports that Blair would step down only next year.
Analysts say sterling has also been caught in the cross-fire of euro and dollar strength. "First of all there is independent dollar strength taking place so we should not be surprised that cable (sterling/dollar) has come down," said Bank of New York currency strategist Simon Derrick.
"I certainly think one has to take into account the stories that have come out in the last 24 hours with regard to the political side. That's a significant story and does coincide with the weakness we have seen in sterling," Derrick said.
Sterling fell more than two thirds of a percent against the dollar to hit a session low of $1.8796, the lowest since August 18. Against the euro, it touched a low of 68.03 pence as the single currency also received a boost from heightened rate rise expectations in the eurozone.
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