By Nigel Stephenson
LONDON (Reuters) - Investors bailed out of sterling and stock markets in Europe and Asia on Monday, seeking shelter in gold and the Japanese yen as uncertainty over the terms of Britain's divorce from the European Union undermined appetite for risky assets.
The dollar rose, except against the yen, rebounding after suffering its worst week since November when it was hit by a lack of clarity over the policies of U.S. President-elect Donald Trump, whose inauguration is on Friday.
"(The movement) shows that people are looking ahead this week with Trump's inauguration and discussions on Brexit. There is a lot of uncertainty moving forward," said Brian Lan, managing director at Singapore-based gold dealer GoldSilver Central
Yields on low-risk German government bonds fell but those on Italian equivalents edged up after rating agency DBRS cut Italy's credit rating after markets closed on Friday in a move that could raise borrowing costs for the country's banks.
But the eye-catching mover was sterling, a day before a speech by British Prime Minister Theresa May in which media reports say she will set the scene for an exit from the EU that will see Britain lose access to the bloc's single market.
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The pound fell as low as $1.1983 in thin early Asian trade, which, barring an unexplained "flash crash" in October, was its weakest against the dollar in 32 years.
Investors will scrutinise May's speech for clues to whether she plans to prioritise immigration controls in a "hard Brexit" that some analysts say could hurt the economy.
The fall in sterling, which makes UK exports cheaper, has contributed to an unprecedented 14-day rally in the blue-chip FTSE 100 stock index.
However, the index was fractionally lower on Monday, though still outperforming falling European markets. The main STOXX 600 index fell 0.6 percent, led by autos and banks.
MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.6 percent, Japan's Nikkei lost 1 percent as the strong yen hit exporters and Shanghai shed 0.3 percent.
Sterling last traded at $1.2025, down 1.2 percent on the day. The euro was up 0.8 percent at 88.12 pence while the yen was up 1.8 percent at 137.05 to the pound.
"Broadly, the market has not had sterling and Brexit and Theresa May in its mind for the last two months - it's been driven by Trump and Treasuries, and more the U.S. drivers. And now for two weeks in a row we've had news on May ... really bring that to the forefront again," said Citi's head of European G10 currency strategy in London, Richard Cochinos.
The dollar index, which measures the U.S. currency against six of its peers, rose 0.4 percent. The euro fell 0.5 percent to $1.0595 while the yen, seen as a safe investment in troubled times, rose 0.4 percent to 114.02 per dollar.
U.S. markets are closed on Monday for a holiday.
German 10-year bond yields fell 2 basis points to 0.32 percent. Italian 10-year yields rose marginally to 1.90 percent.
ITALY DOWNGRADED
Italy's downgrade will mean Italian banks will have to pay more to borrow money from the European Central Bank when they use the country's sovereign bonds as collateral. It may also make Italian debt less attractive for foreign buyers.
Gold, a perennial safe-haven investment, rose 0.4 percent to $1,201 an ounce.
Oil held steady, though doubts that large oil producers will cut output as agreed by the Organization of the Oil Producing Countries and others, put prices under pressure
Brent, the international benchmark, last traded at $55.56 a barrel, flat on the day.
(Additional reporting by Wayne Cole in Sydney, Nallur Sethuraman in Bengaluru, Jemima Kelly, Dhara Ranasnighe and Christopher Johnson in London Editing by Jeremy Gaunt)