Sterling skirts Westminster turmoil, holds steady vs dollar

By Polina Ivanova

LONDON, Nov 9 (Reuters) - Britain's sterling inched up on Thursday as expectations for a gradual tightening of policy from the Bank of England protected the pound from the political turmoil engulfing Prime Minister Theresa May's government.

A string of scandals leading to two resignations from the cabinet in the space of just one week has raised doubts over the Conservative government's ability to secure a strong deal in negotiations over Britain's leaving the European Union, due to restart later in the day.

However, sterling remained broadly stable on Thursday, as high levels of uncertainty in British politics have largely been priced in by the markets, analysts said.

"In the short-term, political uncertainty will remain high. But it is unlikely to rise even further," Credit Agricole (Swiss: ACA.SW - news) currency strategist Manuel Oliveri said.

"A lot would be needed to derail political sentiment even further," he said.

Foreign aid minister Priti Patel was forced from office on Wednesday over undisclosed meetings with Israeli officials, just days after May's ally Michael Fallon, the defence secretary, resigned in a sexual harassment scandal.

The pound was flat against the dollar on Thursday, trading at $1.3116 at 0911 GMT.

It was also flat against the euro, at 88.41 pence .

It marks a brief respite for the currency following a heavy sell-off last week after the Bank of England raised interest rates for the first time in over a decade but told investors to expect just two more hikes in the next three years.

"(Now (Frankfurt: 11N.F - news) ) stable rate expectations are counterbalancing political risk," Oliveri said.

Sterling took a hit on Wednesday from falling bond yields as the gilt yield curve flattened to its lowest level in more than a year. The yield spread between two- and 10-year gilts narrowed to 75.9 basis points, its lowest level since early October 2016.

(Reporting by Polina Ivanova; Editing by Angus MacSwan)