* Yen falls, Chinese yuan rises on Sino-US trade deal optimism
* Sterling jumps as investors cut short positions
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Adds some context, chart and updates prices)
By Olga Cotaga
LONDON, Sept 13 (Reuters) - The euro rose to a 17-day high against the dollar on Friday, heading for its second week of gains, and German government bond yields climbed higher with investors thinking the European Central Bank was done stimulating the ailing euro zone economy.
The central bank cut its deposit interest rate by 10 basis points to a record low of minus 0.5% on Thursday and said it would resume bond purchases on Nov. 1, at a rate of 20 billion euros a month, for an indefinite time.
The bond purchases exceeded many expectations because they are set to run until “shortly before” the ECB raises interest rates. Markets do not expect rates to rise for nearly a decade, suggesting that purchases could go on for years, possibly through most of Christine Lagarde’s term leading the bank.
ECB President Mario Draghi also emphasized the importance of fiscal stimulus and structural reforms, essentially saying that only a combination of both monetary and fiscal stimulus could revive European growth.
The ECB “gave the impression to the market that we’re pretty much done” with monetary policy stimulus, said Vasileios Gkionakis, global head of FX strategy at Lombard Odier, adding that “there’s no denial that the ECB delivered on all fronts.”
“The main message (from the ECB) is that we’ve seen the bottom in the euro/dollar,” Gkionakis said.
The euro was up 0.3% at $1.1099 after earlier reaching $1.11095, its highest since Aug. 27. The 10-year German Bund yield rose to a six-week high of negative 0.48% .
The day before, the euro briefly went below $1.10. Deutsche Bank had projected the euro would fall below $1.10 and once it had the bank said it was neutral on the currency.
“We think the risks on the euro are now turning more two-sided,” George Saravelos, Deutsche’s currency strategist, said in a note, adding he was “not willing to turn bullish just yet.”
“We believe EUR/USD will remain stuck around 1.10,” he said.
The dollar rose overnight against the Japanese yen - after Donald Trump said he would not rule out an interim trade pact with China - then gave back some of those gains.
Washington and Beijing are preparing for new talks to resolve their trade war, which has dragged on for more than a year, roiling financial markets and threatening to push other economies into recession. The yen, a safe-haven currency, tends to rise during times of heightened stress and vice versa.
The dollar was last down 0.1% at 107.99 versus the yen after surging to a six-weeks high of 108.265.
The Chinese yuan strengthened in the offshore market to a four-week high of 7.0330 against the dollar amid optimism on trade. Dollar/yuan was last down 0.3% at 7.0752.
The Hong Kong dollar was on course for its biggest weekly gain against the U.S. dollar since July, mainly on broad-based dollar weakness and speculation that AB InBev and ESR are both mulling reviving their listings. The Hong Kong dollar rose to six-week high of 7.8212 against the U.S. dollar, then slipped back to trade little changed at 7.8279.
Elsewhere, dollar weakness and receding fears of a no-deal Brexit pushed the pound to a seven-week high of $1.2475 . Investors trimmed their expectations of no deal after Northern Ireland’s largest political party said it may agree on certain European Union rules after Britain exits the EU, even though it later denied those comments.
Against the euro, the gains were more constrained, with euro/sterling last down 0.6% at 89.15 pence.
Reporting by Olga Cotaga; editing by Andrew Heavens, Larry King