* US Treasury yields fall towards recent mid-2016 low
* The pound drops below $1.20 on Brexit clash, but recovers
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
(Adds context, updates prices)
By Olga Cotaga
LONDON, Sept 3 (Reuters) - The euro plunged to a 28-month
low against the dollar on Tuesday as investors priced in deeper
negative interest rates for longer in the euro zone.
The common currency's drop also came on the back of a
strengthening dollar as the trade spat between Washington and
Beijing intensified and traders turned to buying U.S. assets as
safe-haven investments without hedging their dollar currency
exposure, analysts said.
Money markets have increased to more than 80% the
probability that the European Central Bank will cut its
benchmark rate by 20 basis points when it meets next week.
The ECB benchmark rate now stands at minus 0.40% and it has
all but promised a monetary policy stimulus package as economic
growth falters. Monday's PMI survey showed European
manufacturing contracted for seven straight
months. The euro EUR=EBS was last down by 0.3% at $1.0936. It fell
to $1.0926 earlier, its lowest since mid-May 2017. A break below
the key $1.1000 level last week had sparked heavier sell-offs.
Against an index of its six major rivals, the dollar .DXY
rose to 99.37 on Tuesday, the highest since mid-May 2017, as
investors became more gloomy about the global economy's
prospects amid the U.S.-China trade dispute.
Bloomberg News reported that Chinese and U.S. officials are
struggling to agree a schedule for a round of trade negotiations
that had been expected this month.
Overseas investors dived into buying U.S. Treasuries,
considered the most liquid and safe investment in tumultuous
times.
The 10-year Treasury bond yield fell 2.5 basis points to
1.48% on Tuesday, close to the low of $1.44% it reached last
week that was last seen in mid-2016.
The flows have boosted the dollar, but investors' decision
to either buy Treasuries unhedged, or trim some of their
currency hedges has intensified the gains in the greenback, said
Richard Falkenhall, senior forex strategist at SEB.
Higher government bonds in the United States compared with
the rest of the developed world makes it worthless to buy U.S.
government bonds to overseas investors if they also buy
protection against unexpected swings in the U.S. currency.
"The dollar tends to outperform all other currencies except
the yen" when the global economy slows down, said Falkenhall.
"Everything is going in the same direction pointing to a
stronger dollar," he said.
EURO AND ITALY
The euro could get some relief if the 5-Star Movement and
the Democratic Party form a coalition government in Italy,
analysts said. 5-Star members will vote on Tuesday on forming a
coalition with PD.
"If the vote succeeds, the euro could gain somewhat," MUFG
analysts said in a note, adding that "Italian assets like bonds
and stocks would likely rally somewhat further".
Elsewhere, the pound fell to its lowest in nearly three
years on Tuesday as British lawmakers prepared to vote on the
first stage of their plan to block Prime Minister Boris Johnson
from pursuing a no-deal Brexit. GBP/ Sterling was last down 0.4% at $1.2012 GBP=D3 after
falling to $1.1959, the lowest since October 2016, when it
plunged to $1.1491 in a flash crash. Against the euro, sterling
touched a two-week low of 91.47 pence EURGBP=D3 .
Euro lowest since May 2017 https://tmsnrt.rs/2zMVY6w
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