Sterling was trading sharply lower early on Friday as it appeared certain the Conservative Party would fall short of an overall majority after the general election.

That raised fears the political turmoil could delay and confound talks on leaving the European Union, which are due to start in less than two weeks, and the pound shed over 2 percent against the dollar.

It dropped as low as $1.2636 and 88.6 pence per euro - two and six month troughs - in early London trading, before clawing back some ground. Yields on 10-year gilts fell 3 basis points to 1.00 percent.

At 1.15pm, the UK currency was down around 1.6 per cent at around $1.29 against the US dollar and had lost 1.26 per cent against the euro to trade at over 87.6p.

The drop in the currency reflects uncertainty about the shape of the next government and what it will mean for the Brexit talks, which are due to get underway shortly.

The drop in the value of sterling, which brought the euro to as high as 88.2p in early Friday trading, will - if sustained - come as a major concern to Irish exporters to the UK. The trend in the days ahead will depend on the talks on the formation of the new government, along with indications of what it will mean for the Brexit talks.

Sterling’s trend against the euro has been reasonably favourable for exporters this year, despite the approaching Brexit talks. However market analysts now warn that significant volatility may lie ahead.

As well as currency markets, the Irish government will also be closely watching the reaction of stock markets, particularly given the plans to dispose of part of its shareholding in AIB in the next couple of weeks.

Sterling initially fell by more than 2 per cent late on Thursday, after the exit poll indicated that the Conservatives were not going to return with a majority. However unlike the night of the Brexit referendum poll, it did not fall significantly further in overnight trading, as analysts and investors tried to work out the likely impact of the vote.

Some feeling that the result may mean a softer Brexit appears to have given sterling some support overnight. This theory was “a factor that has some bids in sterling here,” Jordan Rochester, a currencies analyst at Nomura told the Financial Times overnight.

However with such a high level of political uncertainty, market analysts said that it was simply too early to tell what the vote would mean, bar signalling a period of possible volatility.

In Asian markets, sterling fell earlier to a seven-week low below 140.00 yen before clawing back to 140.69, down about 1.3 per cent on the day.

“There were many participants who wanted to take advantage of the volatility resulting from a key event like the British elections, which explains the pound’s initial steep drop,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

“The swings in the pound have not spilled over into other currencies as the market was well hedged and prepared for a variety of election scenarios.”

(Additional reporting: Reuters)