July 4, 2019 / 7:57 AM / 2 months ago

FOREX-Sliding government bond yields keep dollar and euro under pressure

* Dollar weakens but not as much as Treasury yields

* Euro near 2-week lows following Lagarde nomination

* Aussie backs off 2-month highs

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Tommy Wilkes

LONDON, July 4 (Reuters) - The euro was stuck near two-week lows on Thursday and the dollar drifted away from recent highs as sliding government bond yields pressured both currencies.

The global bond rally has accelerated this week on expectations of more monetary easing from the world’s central banks, although the impact on foreign exchange markets has been limited, with volatility remaining low.

Currencies were quiet at the start of the European trading session, with United States markets closed for a holiday.

Adam Cole, a foreign exchange strategist at RBC Capital Markets, said that while the big drop in U.S. Treasury yields was negative for the dollar, the outright yield advantage the U.S. enjoyed over other countries was supporting demand for the greenback and minimising the spillover into higher volatility.

“The dollar isn’t falling much compared to how much U.S. yields are coming down. It’s explained by the level of yields rather than the rate of change,” he said.

The euro traded slightly higher at $1.1283. It has weakened since IMF Managing Director Christine Lagarde, perceived as a policy dove, was nominated as the next European Central Bank president.

The dollar index was unchanged at 96.767.

The dollar has weakened in recent weeks as expectations build for a Federal Reserve rate cut later this month, although the index is off three-month lows of 95.843 touched in June.

Waning expectations for a quick resolution to the United States-China trade row have also hurt sentiment for the dollar.

Adding to a sense of unease about trade talks, Trump late on Wednesday tweeted to repeat his view that China and Europe are manipulating their currencies to pump money into their economies and said the United States should match these efforts.

The focus now shifts to U.S. non-farm payrolls data due on Friday, which economists expect to have risen by 160,000 in June, compared with 75,000 in May.

“Everyone from the Reserve Bank of Australia to the Fed is talking about inflation disappointing to the downside,” said Mayank Mishra, Singapore-based macro strategist at Standard Chartered. “The Fed arguably has more room to ease than anyone else. That, in theory, should lead to a weaker dollar.”

The yen was little changed at 107.83 yen per dollar , while the Aussie was down 0.1% to $0.7022 after earlier hitting a two-month high.

Sterling changed hands at $1.2575, near two-week lows hit on Wednesday after speculation grew that the Bank of England will follow other central banks and ease policy, or at least put its flagged rate rise on the back burner. (Additional reporting by Stanley White in Tokyo)

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