By Joice Alves

LONDON (Reuters) -Sterling slumped against to a two-year low against the dollar on Tuesday as a crisis in British Prime Minister Boris Johnson’s government compounded pressure on a currency already reeling from recession fears and a resurgent greenback.

Finance minister Rishi Sunak’s resigned minutes after the health minister stepped down saying he had lost confidence in Johnson’s ability to govern in the national interest.

The resignations could be the final blow for Johnson’s premiership after he had tried to apologise for the latest scandal to dog his almost three years in office.

However, the pound had already been under heavy pressure through the day as a big jump in natural gas prices in both Europe and in Britain looked set to push inflation even higher, potentially thrusting the economy into recession.

Sterling was also among the currencies hammered by a resurgent dollar, which is benefiting from a global safe-haven bid as recession fears mount.

News of the British cabinet resignations triggered a slight move lower but sterling stayed off March 2020 lows of $1.1899 hit earlier. It then recouped some losses and by 1930 GMT was trading 1.25% lower at $1.195.

“The initial gut reaction would be…to sell the currency. However, the UK is evidently not the only economy in a precarious or fragile position,” said Philip Shaw, chief economist at Investec.

He argued that, facing a governing crisis, Johnson might even opt for a less confrontational approach towards talks with the European Union over Northern Ireland, “which could lower the perceived threat of a trade war or trade actions.”

The British parliament is considering a new law which would unilaterally change customs arrangements between Britain and Northern Ireland that were initially agreed as part of its EU exit deal.

Analysts said Johnson’s days in office appeared to be numbered but choosing a new Conservative party leader could take weeks.

“The new leader will want to win over voters and the Tory party – so perhaps down the line we’ll see fiscal subsidies for energy and tax cuts to win over the Tory faithful,” said Jordan Rochester, an FX strategist at Nomura.

Sterling was up 0.2% against the euro, which plunged to new two-decade lows against the dollar,

But it shed 1.3% to 162 yen, while against the Swiss franc sterling weakened 0.5% to 1.157.

The Bank of England, trying to tackle soaring inflation without dampening the economy, has raised rates five times since December. Some market players expect a bigger increase of 50 basis points at the next meeting on Aug. 4.

The BoE said on Tuesday the economic outlook for Britain and the world had darkened and told banks to ramp up capital buffers to ensure they could weather the storm.

(Reporting by Joice Alves; additional reporting by Sujata Rao; Editing by Tomasz Janowski, Jane Merriman, Alex Richardson and Mark Heinrich)

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