Sterling dragged down to two-week low on Brexit worries

(updates prices, adds fund manager's quote, fresh poll)

By Anirban Nag

LONDON, May 9 (Reuters) - Sterling fell to a two-week low against the dollar on Monday, due in part by opinion polls showing that the outcome of a race between those wanting to stay in the European Union and those wanting to leave was on a knife edge.

A YouGov (LSE: YOU.L - news) opinion poll for ITV (LSE: ITV.L - news) television showed the "In" campaign leading by 42 percent to 40 percent for the "Out" camp. An ICM poll released in the afternoon showed 46 percent of Britons wanted to leave, while 44 percent wanted to stay in.

Eikon readers can click cpurl://apps.cp./cms/?pageId=brexit for the latest news and analysis on the EU referendum.

Traders also pointed to a Sunday Times report that Bank of England chief Mark Carney was preparing to cut interest rates, in the event of Britain choosing to leave in the June 23 referendum.

The BOE's monetary policy committee meets this week and the Bank, which has warned about the economic risks of a Brexit, will release updated growth and inflation forecasts in a quarterly report on Thursday. Governor Carney will also address a news conference the same day.

Sterling fell to $1.4375, down 0.4 percent on the day and well below a four-month high of $1.4770 last Tuesday. It was last trading at $1.4396, down 0.3 percent on the day.

The euro was slightly higher at 79.14 pence.

"Last week, 10-year gilt yields declined by 20 basis points, pushing nominal yield differentials against sterling," said Hans Redeker, chief currency strategist at Morgan Stanley (Xetra: 885836 - news) .

"This week's focus will be on Thursday's release of the quarterly Inflation Report. The UK has entered a cyclical slowdown, suggesting rate expectations to fall further," he said, recommending investors to sell the pound against the dollar and the Swedish crown.

Sterling fell last week, retreating from four-month highs, after poor surveys of manufacturing, construction and services highlighted the economic risks posed by the vote. The surveys indicated the economy was on track for a quarterly growth of 0.1-0.2 percent, down from 0.4 percent in the first quarter.

Most economists believe leaving the EU would deal a blow to the British economy, with a hefty current account deficit - 7 percent of GDP in the last quarter of last year - leaving it vulnerable to any pull-back in investment flows.

The Sunday Times report said the Inflation Report this week is likely to deliver its most detailed warning on the potential impact of Brexit on the economy, which is sharply slowing ahead of the June vote.

"The front-end of the UK money market curve prices a 40 percent chance of a rate cut by year-end," said Tanguy Le Saout, Head of European Fixed Income at Pioneer Investments, adding that this pricing was rather aggressive.

On Monday, Prime Minister David Cameron upped the rhetoric, saying that staying in the European Union helped protect the country and boosted its power on the world stage.

He also challenged "Out" campaigners to show how Britain would be safer and better off if the country left the EU. (Reporting by Anirban Nag; Editing by Tom Heneghan and Richard Balmforth)