The prospect of a hung UK Parliament saw the value of sterling slide to a two-month low against the US dollar.
Traders work on the trading floor of ETX Capital in London as markets open the day after Britain's general election. Photo: AFP
The shock British election result, which left the Conservative Party without a majority, hit the sterling and left the dollar on course for its best day in over a month.
Meanwhile, world shares headed towards their first weekly fall since April.
The outcome of the snap poll, called by Prime Minister Theresa May to try to bolster her parliamentary majority, was a blow to investors who had already weathered major risk events in the United States and Europe the previous day.
But the reaction as it unfolded suggested a more limited impact than after last year's Brexit vote, which triggered a prolonged decline in the pound and unsettled other assets.
After a sharp initial fall, the pound steadied early in European trading and then began to claw back ground. Safe-haven gold and US Treasuries drifted lower and futures markets pointed to Wall Street opening modestly higher.
"The uncertainty is bad news for sterling," Bank of America, Merrill Lynch strategist James Barty said.
"I think for the global market it doesn't matter. Unlike Brexit, which at the time had a spillover into other markets, this is a very UK-specific thing."
The election outcome raised fears political turmoil could delay and confound talks on leaving the European Union, which are due to start in less than two weeks.
The pound shed more than 2 percent against the dollar, dropping as low as $US1.2636 and 88.6 pence per euro - two-and six-month troughs - before recovering all the way to $1.2741 and 87.70.
UBS strategist John Wraith said there was a high likelihood of a potentially prolonged period of uncertainty over whether May would be replaced. But he cautioned bears against chasing the pound much lower.
"Today's result will in part be seen as a vote against a definitive break from the EU, and the market may soon begin to reassess the probability of a so-called 'hard Brexit'."
Reuters / BBC
