February 9, 2017 / 12:46 AM / a year ago

FOREX-Dollar sags on lower yields; euro zone risk in focus

* Dollar/yen hovers near 10-week low, sharp yield fall takes toll

* Weakened dollar gives beleaguered euro some reprieve

* European politics and U.S.-Japan summit remain in focus

By Shinichi Saoshiro

TOKYO, Feb 9 (Reuters) - The dollar drooped against its peers early on Thursday, hovering near a 10-week low versus the yen, with a slide in U.S. Treasury yields amid investor flight to safety taking a toll on the currency.

The euro was little changed at $1.0692 after rising 0.15 percent overnight. The common currency descended to a one-week low of $1.0640 earlier Wednesday on heightened European political woes before pulling back as the dollar retreated.

The dollar was down a fraction at 111.870 yen, in close reach of the 10-week trough of 111.590 plumbed earlier in the week.

The greenback had risen above 112.500 yen earlier the previous day but reversed course as Treasury yields slid sharply overnight.

“We are now in a phase where downside risks to the dollar has become predominant, with the drop in Treasury yields having gained further momentum this week due to perceived European political risks,” said Junichi Ishikawa, senior forex strategist at IG Securities in Tokyo.

The five-year Treasury note yield hit a nine-week low on Wednesday.

Buying of U.S. Treasuries gathered steam this week as expectations for a March interest rate hike by the Federal Reserve have begun waning.

Uncertainty about European politics has also boosted Treasuries. Recent polls have shown German Chancellor Angela Merkel falling behind a candidate from the country’s Social Democrats in this year’s elections. Polls have also suggested France’s Marine Le Pen, who has championed pulling the country out of the European Union, is gaining ground.

While hurting the dollar by pushing down U.S. yields, geopolitical concerns stemming from Europe have also weakened the greenback against its Japanese counterpart by increasing demand for the safe-haven yen.

The yen could be poised for further gains should U.S. President Donald Trump reiterate his opposition to a strong dollar when he meets Japanese Prime Minister Shinzo Abe at a two-day summit starting on Friday.

“Trump may opt to take a tough stance against Japan amid the perceived political chaos. Taking such a stance would also set him up to talk tough with China,” Ishikawa at IG Securities said.

Trump and his top trade adviser Peter Navarro criticised Germany, Japan and China last week, saying the trading partners were engaged in devaluing their currencies to the disadvantage of the United States.

The dollar index against a basket of major currencies was down 0.1 percent at 100.210.

The Australian dollar, sensitive to shifts in broader risk sentiment, slipped 0.2 percent to $0.7632.

The pound was little changed at $1.2525. Sterling has stuck near the $1.25 threshold this week, as suggestions that Britain’s economy could sustain interest rate rises have managed to offset warnings about the economic impact of Brexit. (Editing by Jacqueline Wong)

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