NEW YORK (Reuters) - Sterling rose to a more than six-month high against the dollar on Tuesday after British Prime Minister Theresa May called for an early general election, boosting hopes that a victory could strengthen her party's majority in government ahead of Brexit negotiations.
May called for an early election on June 8, saying she needed to strengthen her hand in divorce talks with the European Union by bolstering support for her Brexit plan.
"The way the market is reading it, it is viewed as something that creates a more stable political outlook for Brexit to happen, which in itself is viewed as a positive," said Alvise Marino, FX strategist at Credit Suisse in New York.
Sterling shook off early weakness to rise 2.7 percent against the dollar to $1.2904, its highest level since early October. The pound rallied hard late in the session after it topped the December high of $1.2774, spurring short covering, analysts said.
"It was a technical move backed by a fundamental reason," said Alan Ruskin, global head of currency strategy at Deutsche Bank in New York.
Sterling was last up 2.19 percent to $1.2836.
Analysts said the drop in U.S. Treasury yields pressured the dollar, while U.S. manufacturing output dropped for the first time in seven months.
U.S. Treasury yields fell to five-month lows as nervousness ahead of France's first round of presidential elections this weekend and ongoing geopolitical tensions increased demand for safe-haven U.S. debt.
The dollar index, which measures the greenback against a basket of six major currencies, was down 0.76 percent at 99.531.
Concerns about North Korea and the French presidential elections also pressured the dollar against the yen, which is traditionally viewed as a haven for capital in times of political and economic stress.
Against the yen, the dollar was down 0.35 percent at 108.51 yen. The euro was 0.82 percent higher at $1.0727 EUR=, having moved little on Monday, when many European markets were shut for the Easter holiday.
On Tuesday, Goldman Sachs abandoned the two strong dollar plays in its 2017 trading recommendations, pointing to the Trump administration's concerns over the strength of the currency and improvement in growth in rival economies.
Investors were also watching ongoing U.S.-Japan economic talks for signs of the direction U.S. trade policy could take under President Donald Trump, who campaigned on a protectionist platform.
Additional reporting by Saqib Iqbal Ahmed and Richard Leong; Editing by Dan Grebler and Leslie Adler