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LONDON (Reuters) - Sterling fell to an eight-week low against the dollar and the basket of currencies measuring its broader strength on Tuesday, hit by fears of prolonged political jousting over the terms of Britain's exit from the European Union.
British Prime Minister Theresa May won parliamentary backing on Monday to begin the process of leaving the EU and start two years of talks that will shape the future of Britain and Europe.
May said she would notify parliament this month when she has triggered Article 50 of the EU's Lisbon Treaty to begin the formal process, after her spokesperson dismissed media reports she would launch the talks on Tuesday as "speculation".
Banks reported selling of the pound from the moment traders arrived at their desks in Europe on Tuesday, driving sterling almost a full cent lower by 8:00 a.m. (0800 GMT).
"The triggering of Article 50 has been well telegraphed and is unlikely to cause a major stir for sterling in itself," UBS, head of UK Rates Strategy & Economics, John Wraith, said.
"It does, however, increase headline risk, particularly as the opening negotiating positions of the two sides are far apart. This may shift attention back to the UK's large current account deficit ... (and) does not bode well for sterling."
Having ridden out the latest political headlines on Monday while the dollar was weak, sterling traded as low as $1.2110 before recovering to $1.2163 by 1615 GMT.
It fell as much as 0.7 percent against the euro to 87.85 pence, last trading at 87.48 pence per euro.
Dealers and analysts were still picking through the consequences of Scottish First Minister Nicola Sturgeon's demand on Monday for the right to hold a second Scottish independence referendum around the end of next year.
Sterling initially climbed after that announcement, with analysts citing relief among investors that the vote would not be held this year.
But Bank of New York Mellon currency strategist, Neil Mellor, said the referendum call was playing into the pound's weakness on Tuesday.
"The (market) focus for quite some time has been very short term and very headline driven," he said. "Today was a classic example of European markets catching up with yesterday's news."
Several of the currency world's top 10 banks, who were more cautious on the pound at the end of last year, have been aggressive in the past fortnight in advocating more declines.
Among major currencies, only the Turkish lira has performed worse against the dollar this year than the pound and market measures of positioning still show room for investors to bet more heavily against the UK currency. [IMM/FX]
If the U.S. Federal Reserve raises interest rates on Wednesday as expected, and expectations for more rate rises grow, more losses against the dollar seem inevitable.
"As U.S. real yields edge higher and the prospect of further Bank of England/Fed de-coupling looms large, it seems inconceivable that sterling can avoid falling below $1.20," Societe Generale strategist Kit Juckes said.
Additional reporting by Jemima Kelly; Editing by Larry King