July 3, 2019 / 8:13 AM / 15 days ago

FOREX-Bond yield slump hits dollar, pound; Swedish crown the exception

* Dollar index nudged off 2-week highs

* Global bond yields fall on dovish cbanks, fading trade optimism

* Swedish crown firms as Rijksbank holds policy tightening line

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Updates throughout, changes byline, dateline)

By Sujata Rao

LONDON, July 3 (Reuters) - The dollar slipped to a one-week low against the Japanese yen on Wednesday, undermined by the steady fall in U.S. Treasury bond yields, fading optimism over the Sino-U.S. trade deal and the possibility of fresh tariff hostilities with Europe.

More and more currencies are under pressure from central banks’ increasingly dovish tone, though the Swedish crown stood out, firming to 2-1/2 month highs versus the euro after the central bank said it was on track to tighten policy by early 2020.

Against a basket of six major currencies, the dollar pulled back from two-week highs scaled on Tuesday as U.S. bond yields extended the previous day’s heavy fall, with 10-year yields hitting 2-1/2-year lows.

The other currency in focus was the pound, which fell on Tuesday in tandem with British government bond yields.

Ten-year gilt yields slipped below the Bank of England’s main policy rate for the first time since the 2008 crisis after markets interpreted BOE Governor Mark Carney’s comments as dovish. Sterling slipped 0.2% to a new two-week low.

“Two movers today are the yen, which is the risk-off safe haven, and the pound which keeps heading lower,” Colin Asher, senior economist at Mizuho, said, adding that it had seemed “like Carney is potentially teeing up a rate cut.”

The yen firmed 0.23% to the dollar at 107.6 yen as investors grew more sceptical about the possibility of a speedy resolution to the trade war, especially given U.S. President Donald Trump’s comments that any deal would have to be tilted in favour of the United States.

Sentiment was also dented by Washington’s threat of tariffs on $4 billion of additional European Union goods in a long-running dispute over aircraft subsidies.

Currencies are also under pressure from signs that more and more central banks are set to ease monetary policy to combat economic slowdown.

“The dovish stuff from central banks is pushing yields down across the board. It’s starting to look like the weakness in manufacturing is starting to spread to the services sector and that’s an alarm bell, a sort of green light to central banks to ease policy,” Asher said.

However, Sweden’s central bank held its line on policy tightening by year-end or early-2020, noting a “good” inflation and economic outlook.

The Swedish crown rallied to 2-1/2 month highs against the euro of 10.4890 and rose into positive territory versus the dollar.

The euro was little changed at $1.128 following a volatile session on Tuesday, when it swung between a low of $1.1275 and a high of $1.1322.

The common currency briefly received a lift on Tuesday after a media report that European Central Bank policymakers would not rush to cut rates at their July meeting. But it later slipped after IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next ECB president.

Yields across the euro zone have fallen further, with German 10-year yields on the cusp of falling under the ECB’s minus 0.40% level.

Lagarde’s nomination if confirmed “should ensure a continuation of the pragmatic approach to policy-setting at the ECB favoured by (current president Mario) Draghi,” analysts at Daiwa said.

Reporting by Sujata Rao; Additional reporting by Shinichi Saoshiro in Tokyo Editing by Susan Fenton

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