The pound slipped on concern the UK may leave the European Union without a divorce deal after members of the Conservative party voted for Boris Johnson to be the next prime minister.
Sterling fell for a third day after Johnson, who has vowed to march the UK out of the EU with or without a deal by October 31, won the contest to beat rival Jeremy Hunt by a landslide. With the former mayor of London expected to announce a shake-up to the inner circle of government, traders will now wait to see who his chancellor will be.
"A Boris Johnson win is no surprise," said Neil Jones, head of hedge-fund currency sales at Mizuho Bank. "What the pound market will be all ears on now is any hints of fiscal stimulus, tax cuts, the end of austerity and any projects."
The pound fell 0.3% to $1.2444, after touching the lowest since July 17 earlier Tuesday. The currency has already slid more than 2% since the Conservative Party leadership contest began in May as asset managers and hedge funds added to short positions.
After Johnson's victory, the EU's chief Brexit negotiator Michel Barnier said he looked forward to working constructively with the next prime minister, who has promised to deliver Brexit by October 31 "do or die". That stance has already led Alan Duncan to quit as foreign office minister.
"A Treasury team of Brexit hardliners would likely facilitate yet another reason to play sterling still from the short side," said Jeremy Stretch, head of G-10 currency strategy at Canadian Imperial Bank of Commerce.
Sterling slid to near a two-year low earlier in the session after Bank of England hawk Michael Saunders signaled Brexit vulnerabilities may prevent it from raising interest rates. A smooth departure from the EU, which the BOE's forecasts assume, is very uncertain, policy maker Saunders said in a Bloomberg interview. Brexit risks may stop the BOE from raising rates even if its forecasts imply a need to do so, he said.
Fellow policy maker and the BOE's Chief Economist Andy Haldane followed that by saying Tuesday there is a strong case to keep rates on hold.