LONDON (MarketWatch) -- Political turmoil kept the British pound under pressure Friday as Prime Minister Gordon Brown began a reshuffle of his cabinet in a last-ditch bid to hold onto power.
The U.S. dollar lost ground versus the euro and the Japanese yen in quiet trade ahead of the release of May nonfarm payrolls data at 8:30 a.m. Eastern time, and was mixed versus other currencies.
Sterling had previously proven nearly impervious to Brown's mounting political woes, notching a seven-month high versus the greenback above $1.66 earlier this week.
But the pound lost its luster Thursday and extended losses Friday to trade at $1.6054 in recent action, down from $1.6176 in North American trade Thursday afternoon.
The BBC reported Friday morning that Chancellor of the Exchequer Alistair Darling, a post roughly equivalent to finance minister, would stay in his post. News reports said Darling had resisted efforts by Brown to move him to another post.
Brown was set to accelerate a planned reshuffle of his cabinet after Work and Pensions Secretary James Purnell resigned Thursday and called on Brown to step aside in order to give Labour a chance to avoid defeat in the general election that must be held no later than mid-2010.
The moves come after elections Thursday for local government posts in England and the European Parliament were expected to show heavy losses by Labour.
Moreover, fringe parties are expected to have posted a strong showing in the European elections, while the Liberal Democrats are expected to have made strong headway in Thursday's local contests at the expense of Labour and the Conservative Party.
That raises the specter of a potential "hung parliament" in the next general election.
That's helped to unsettle foreign-exchange markets and put pressure on the pound, said Russell Jones, head of fixed income and currency strategy research at RBC Capital Markets.
The pound trimmed losses just slightly after the Office for National Statistics said May output producer prices saw a monthly rise of 0.4% and a year-on-year decline of 0.3%.
The monthly rise exceeded forecasts for a 0.2% rise, while the annual fall was in line with economists' expectations. The May data showed the first year-on-year decline in producer prices since 2002.
Focus on payrolls
The dollar index , which measures the performance of the greenback against a basket of currencies, rose slightly to 79.476, up from 79.446 in North American trade Thursday afternoon.
The euro traded at $1.4188, up slightly from $1.4171. The dollar traded at 96.67 yen versus the Japanese currency, down from 96.84 yen.
Economists surveyed by MarketWatch expect seasonally adjusted payrolls to fall by 500,000 in May following a loss of 539,000 in April. That would mark the seventh consecutive month with more than a half-million lost jobs. See full story.
The unemployment rate is expected to rise to 9.2% from 8.9% in April.
"Today is all about U.S. [payrolls], but with a majority of participants believing that the worst for the economy is over and jobless data are improving, there is a risk that markets could be caught off guard by a more negative outcome," wrote strategists at Lloyds TSB, in a research note.
With a payrolls drop of around 500,000 and a rise in the unemployment rate to 9.2% likely priced in, it would likely take a fall of 550,000 or more to trigger safe-haven buying that would potentially provide a lift for the dollar, they said.
