Sterling fell to a two-week low after a new opinion poll slashed the Tory lead in the general election campaign to five points, says the Financial Times.
According to YouGov's latest survey, the Conservatives are on 43 per cent, down one point, while Labour is up three points on 38 per cent.
At the beginning of the month, the pollsters had the Tories ahead at 19 points, while others had the lead as high as 24 points.
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Business Insider says the latest finding would reduce Theresa May's Commons majority to just two seats, after at one time having the realistic prospect of a majority of 150.
Following the poll, the pound fell by 0.5 per cent, which The Independent says is the steepest fall for three weeks, and was trading at $1.287, after touching $1.30 last week amid the crisis in Donald Trump's White House.
A weaker majority for the Tories raises political risks related to Brexit in particular, says the FT.
Chris Turner, head of currency strategy at ING, said: "To the extent to which pound longs were built on the basis of an anticipated large Conservative majority and a lower probability of a cliff-edge Brexit, the rationale is now being questioned."
Traders believe a stronger hand for May will mean she can be more assured in her negotiations with the EU, which will reduce the chances of a chaotic departure from the bloc.
Some also believe a larger majority will mean she is less dependent on the Eurosceptics in her backbenches and, given her previous support for the EU, make an ultra-hard Brexit less likely.
Whether the current polling bears any relation to what happens on election day remains to be seen - May, after all, remains more popular than main rival Jeremy Corbyn.
Most of the shift in polling is being attributed to the Tories' so-called dementia tax policy and subsequent U-turn, with a separate study saying more than a quarter of Conservative voters are less likely to support the party as a result.
