* Political headwinds undermine recent bright U.K. data
* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh
LONDON, Nov 13 (Reuters) - The dollar edged higher on Monday as last week's spike in U.S. bond yields supported the currency, with sterling -- battered by political headwinds -- the biggest loser.
Sterling was down 0.7 percent at $1.3087, dropping away from an eight-day peak of $1.3229 scaled on Friday on better-than-expected British industry data.
The Sunday Times reported that 40 members of parliament from British Prime Minister Theresa May's Conservative Party have agreed to sign a letter of no-confidence in her.
That is eight short of the number needed to trigger a leadership contest, through which May could be forced from office.
"The political news over the weekend show that her position is coming under increasing pressure and currency markets are reacting to that," said Alvin Tan, an FX strategist at Societe Generale in London, who recommends holding euros against sterling.
The newspaper report lifted implied currency volatility on sterling -- market gauges to predict price movements for currencies -- from recent lows even as FX options market data showed positions were evenly balanced.
Currency strategists predict further pain for the pound.
Morgan Stanley strategists said in a note that sterling was trading 2 percent above levels that 10-year differentials between UK and U.S. yields suggested, while positioning data showed leveraged investors were still net long sterling assets.
The dollar index against a basket of six major currencies was 0.25 percent higher at 94.617, following a 6-basis-point rise in long-term U.S. Treasury yields on Friday.
The index ended the previous week with a loss of 0.6 percent amid investor disappointment that a proposed U.S. corporate tax cut could be delayed to 2019.
Spreads between ten-year U.S. and German bond yields were trading at 198 basis points, not far from a six-month high of 204 basis points hit in late October.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.bi z / c m s / ? p a g e I d = l i v e m a r k e t s (Additional reporting by Shinichi Saoshiro in TOKYO; editing by John Stonestreet)