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UPDATE 2-European bond yields edge up slightly even as dollar hits new lows

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices)

LONDON, Aug 18 (Reuters) - German government bond yields were set to end Tuesday’s session around one basis point higher with European debt still a major beneficiary of a broadly weaker dollar fuelling demand for fixed income assets elsewhere.

With little in terms of major data this week except flash European PMI estimates on Friday, investors resumed the hunt for alternative safe-haven assets to U.S. Treasuries.

In quiet London trading, benchmark German government debt yields eased to their lowest since last Wednesday before reversing course later in the session. At 1414 GMT, they were at -0.447%, nudging up half a basis point on the day.

Other core European debt yields, including on French and Belgian bonds, were also marginally higher.

Last week German government bonds sold off sharply, pushing yields to a one-month high.

“The general picture is very uncertain overall and we see a lot of risks in the coming months so European government debt should remain supported in the short term,” said DZ Bank rates strategist Sebastian Fellechner.

The dollar fell to a fresh two-year low against a basket of its rivals on Tuesday as a deadlock on further policy stimulus and concerns about escalating tensions between Washington and Beijing cast a shadow over the greenback’s medium-term outlook.

The prospects of a weakening dollar and negative inflation-adjusted yields thanks to the Fed’s unprecedented stimulus measures in recent months have dented demand from investors in Japan and Europe in recent months.

Net bearish bets on the U.S. dollar grew to their largest since May 2011 last week and spot trade in recent days suggests the position has only grown further since.

Strategists at Mizuho noted the dollar’s weakness has seen European, British and Japanese bonds rally, suggesting “this was another leg of the ongoing real money flow out of dollar assets”.

British two-year bond yields fell to their lowest level in nearly two weeks, but were last 2 bps higher on the day.

Even peripheral European bonds such as Italian debt have rallied in recent weeks with the closely watched Italy-Germany yield spread, an indicator of risk appetite towards the euro zone, dropping below 144 basis points on Monday, the tightest level since end-February.

It was trading at 145 bps on Tuesday.

Reporting by Saikat Chatterjee Editing by Kirsten Donovan and David Holmes

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