By Patrick Graham
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 a prolonged bout of political jousting over the terms of Britain's exit from the European Union.
British Prime Minister Theresa May on Monday won the right to launch divorce proceedings with the EU on Monday, beginning two years of talks that will shape the future of Britain and Europe.
Her spokesman dismissed as "speculation" media reports that she would launch the talks on Tuesday, and instead suggested it would be toward the end of the month.
Also on Monday, Scottish First Minister Nicola Sturgeon demanded the right to hold a second Scottish independence referendum either late next year or at the start of 2019.
Sterling initially climbed after that announcement, with analysts citing relief among investors that the vote would not be held this year plus known aspects of the EU exit process.
"The triggering of Article 50 has been well telegraphed and is unlikely to cause a major stir for sterling in itself," said John Wraith, head of UK Rates Strategy & Economics at UBS.
"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 ... (it) does not bode well for sterling."
Having ridden out the latest political headlines on Monday while the dollar was weak, a resurgence for the greenback in Asian trading and soon after opening in Europe sent sterling spinning as low as $1.2110.
It fell as much as 0.7 percent against the euro to 87.85 pence (EURGBP=D3).
Sterling has been the worst performer against the dollar among major developed-world currencies as a result, just as the U.S. Federal Reserve prepares to raise the official interest rate premium for holding dollars on Wednesday.
"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," said Societe Generale (PA:SOGN) strategist Kit Juckes.
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.