September 19, 2018 / 3:53 AM / in 8 months

FOREX-Yen at 2-mth low even as trade tensions escalate, pound firm before EU summit

* Graphic: World FX rates in 2018

* Yen at 2-mth low as traders ponder U.S. tariffs on Chinese goods

* U.S. 10-year yield spikes above 3 pct to 4-month high

* Sterling supported on hopes of deal at EU summit

By Hideyuki Sano

TOKYO, Sept 19 (Reuters) - The Japanese yen stood near-two-month lows as financial markets took fresh U.S. tariffs on Chinese goods in their stride and as U.S. bond yields shot up to four-month highs on fears of higher inflation.

The British pound held firm, briefly hitting its highest levels in about two months versus the dollar, the euro and the yen, on hopes the European Union and the U.K. will strike a deal to avoid a hard Brexit.

The yen dropped to a two-month low of 112.395 yen per dollar on Tuesday, edging closer to its July 19 trough of 113.18, which was its lowest in six months. It last stood at 112.34.

China and the United States plunged deeper into a trade war after President Donald Trump levied tariffs on $200 billion worth of Chinese goods, which drew quick retaliatory duties from Beijing on about $60 billion worth of U.S. goods.

“It seems as though the markets had already priced that in after media reports that Trump is planning to introduce the new tariffs,” said Shinichiro Kadota, senior strategist at Barclays.

Some took comfort from the fact that Washington’s new duties were set at 10 percent for now before going up to 25 percent by the end of 2018, rather than an outright 25 percent tariff.

“There is a chatter in markets that the impact of the tariffs may not be that big after all,” said Minori Uchida, chief currency strategist at MUFG Bank.

“Yet Trump is clearly saying he would retaliate if China retaliates, which it did. I do not think the current positive mood can last long,” he added.

In addition, U.S. bond yields shot up as tariffs added to concerns about higher U.S. inflation, helping to boost the dollar against the yen.

The 10-year U.S. Treasuries yield rose more than 5 basis points on Tuesday to above 3.05 percent, hitting its highest level since late May.

The Federal Reserve is widely expected to raise interest rates twice more before the end of year, and Fed funds futures are pricing in a further two more hikes next year, instead of just the one priced in at the start of this month.

In contrast, the Bank of Japan kept its policy on hold, as widely expected, on Wednesday.

Markets will be looking to BOJ Governor Haruhiko Kuroda’s post-meeting comments, after Prime Minister Shinzo Abe said last week the central bank’s ultra-easy policy should not continue forever.

Yet few thinks Kuroda will ruffle markets ahead of the ruling Liberal Democratic Party’s leadership contest on Thursday, even though Abe looks certain to beat challenger, former defence minister Shigeru Ishiba.

Sterling held firm on hopes about progress towards a Brexit deal ahead of an informal European Union summit in Salzburg on Wednesday and Thursday.

The pound hit a high of $1.3175, its highest level in almost eight weeks and last stood flat at $1.3152. It hit a seven-week high of 0.8865 pound per euro.

Against the yen, the pound hit a two-month high of 148.02 yen.

British Prime Minister Theresa May said Britain and the European Union were nearing a divorce deal.

The EU’s chief negotiator Michel Barnier said on Tuesday the European Union is ready to address key British concerns over Northern Ireland, in a clear push to get a Brexit deal effectively done in the next month.

The euro was little changed against the dollar at $1.1679 .

The dollar index stood almost flat at 94.602, after having touched a seven-week low of 94.308 the previous day. (Editing by Shri Navaratnam)

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