Sterling hovers near two-month high vs struggling dollar

LONDON, April 30 (Reuters) - Sterling held firm near a two-month high against a weak dollar on Thursday, as investors cut their bets on the greenback after the Federal Reserve signalled a longer wait for interest rate hikes, having downgraded its outlook on the U.S. economy.

A low reading for U.S. first-quarter growth capped a poor run of data on Wednesday, and the Fed's policy statement was also seen as confirming that it will hold off on any interest rate rise in the coming months.

Also helping sentiment towards the British pound was a poll that showed the ruling Conservative Party had a five-point lead over the opposition Labour Party.

Most polls, though, show the Conservatives and Labour neck-and-neck before the May 7 election, making a hung parliament likely. Many expect weeks of uncertainty over the makeup and solidity of the government to follow.

Analysts have played up the chance of volatile moves in the pound as a result. Prices of options guarding against such uncertainty have remained high. One-month implied volatility was trading much higher than two-month volatility, indicating weeks of uncertainty just after the election.

Sterling rose to $1.5490, within a whisker of a two-month high of $1.5498 struck on Wednesday after weak U.S. GDP numbers. The euro was up 0.7 percent at 72.57 pence.

"It's not a sterling story right now," said Richard de Meo, managing directors at Foenix Partners, whose firm offers currency solutions to UK companies. "Investors are cutting long dollar positions, and what we are seeing is that a lot of UK importers are buying dollars at lower levels."

"The election is not an issue right now, but next week it will become one," he added.

Analysts say investors, both domestic and international ones, will get more jittery about the election as the date approaches. Most are worried about prolonged negotiations on forming the next government and the possibility of a weak administration emerging that cannot deal with Britain's fiscal and current account deficits.

And while many traders in London's traditionally right-leaning City say a Labour-led government would be negative, they are also concerned about the Conservatives promise to hold a referendum on whether Britain should leave the European Union.

"After the vote, the outcome and the haggling, a good deal will be expressed in sterling," said Bill O' Neill, head of CIO research at UBS Wealth Management. "There is limited risk premium being shown in UK markets now, but that could all change." (Reporting by Anirban Nag; Editing by Hugh Lawson)