Sterling falls vs dollar as post-election shine starts to wear off

By Jemima Kelly

LONDON, May 18 (Reuters) - Sterling fell against a broadly stronger dollar on Monday, losing some of its post-election shine as investors focused on the risks of a looming referendum on Britain's EU membership and new government spending cuts.

The pound posted its best performance in six years against the dollar in the last two weeks, surging after the pro-business Conservative party unexpectedly triumphed in Britain's parliamentary election on May 7, winning an outright majority for the first time in 23 years.

Investors had for months worried that no party would win a majority, which could have led to weeks of political uncertainty - a negative factor for sterling - until a coalition emerged.

But with British finance minister George Osborne announcing on Friday he would spell out on July 8 how he plans to make further big cuts to public spending, investors are becoming concerned that such austerity will see the Bank of England hold off from raising interest rates for longer.

Worries are also increasing about the impact of a British exit from the European Union if Britons vote to leave in a referendum promised by the Conservatives by 2017.

Sterling was 0.4 percent lower on the day at $1.5675, more than a cent away from last week's 5-1/2-month high of $1.5815, as the dollar rallied across the board after losing around 4 percent in a month against a basket of major currencies.

"We did have a feel-good factor in sterling after the election," Rabobank currency strategist, Jane Foley, said.

"But there is a risk in July that the Conservatives frontload some of that austerity, and the EU referendum doesn't seem to be far from anyone's lips now in relation to the UK economy. Both those factors have the capacity to be sterling-negative."

Against a weaker euro, the pound was 0.4 percent up at 72.575 pence.

Currency traders largely brushed off a BoE Inflation Report last week that cut growth forecasts and warned about a strong pound's impact.

On Wednesday, they will get another look into the bank's thinking on monetary policy, when the minutes from its latest policy meeting are released.

"With the forward curve priced for close to zero risk of a rate hike before year-end, we think upside surprises would solicit a bigger market reaction than downside surprises, as would any hint that a hawkish minority is beginning to re-emerge on the MPC (KOSDAQ: 050540.KQ - news) ," RBC (Other OTC: RBCI - news) strategists wrote in a research note.

"We look for a 9-0 vote." (Editing by Louise Ireland)