* Yen stands tall vs peers as trade woes stoke risk aversion
* Focus on outcome of pivotal US-China talks starting Thursday
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh
By Tom Finn
LONDON, May 9 (Reuters) - The Japanese yen surged to a 3-month high against the dollar on Thursday as investors piled into the safe-haven currency fearing that the U.S.-China trade conflict could escalate.
Two days of trade talks begin in Washington on Thursday and traders are waiting to see whether Chinese and U.S. negotiators can salvage a deal to prevent more U.S. tariff increases.
Currency moves this week in response to a new bout of trade war angst have been fairly muted but Thursday’s jump in the yen - which tends to attract demand in times of political strife and market turmoil - suggested investor nerves are fraying.
The main casualties of the heightened tensions have been the Australian dollar, a proxy for Chinese economic prospects , the U.S. dollar and the offshore Chinese yuan .
The yuan on Thursday fell half a percent to hit a four-month low of 6.838 and was headed for its worst four-day decline in a year.
“It looks very much like a trade deal is almost off the table and that the U.S. will impose new tariffs on Chinese goods tomorrow. Fears in the market are mostly reflected in yuan exchange rates,” said Ulrich Leuchtmann, an FX strategist at Commerzbank.
Unlike previous episodes when the dollar benefited from an increase in trade worries, U.S. President Donald Trump’s latest threat to raise tariffs on Chinese imports have prompted market strategists to focus on the corrosive impact on Washington.
The prospects of an escalation in the conflict has seen the yen gain in recent days.
The currency rose 0.3 percent against the dollar at 109.640 yen, a 3-month high, taking its gains to more than 1 percent so far this month.
According to the latest Commodity Futures Trading Commission data, speculators have further raised their net long dollar bets, including those against the yen.
Trump said on Wednesday that China “broke the deal” reached in talks with the United States, and vowed to not back down on imposing new tariffs unless Beijing “stops cheating our workers”.
Shin Kadota, senior strategist at Barclays in Tokyo, said the yen “owes much of its strength to gains made in the cross currency market. ‘Risk on, risk off’ has been the main market driver and the euro has been stuck in range as a result.”
Reporting by Tom Finn; Editing by Angus MacSwan