* Euro, yen hit new highs vs dollar
* Tumbling Treasury yields blunt U.S. rate advantage
* Dollar on course for worst week since 2016
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Updates throughout.)
By Tommy Wilkes and Iain Withers
LONDON, March 6 (Reuters) - The euro rose past $1.13 on Friday and the yen pushed below 105, as a drop in U.S. government bond yields put the dollar on course for its worst week since 2016.
Investors have slashed their expectations for U.S. interest rates after an emergency Federal Reserve rate cut of 50 basis points this week.
That is wiping out the yield advantage that had fuelled a popular carry globally - borrowing at negative rates in the euro and yen to buy U.S. assets. Markets now bet the Federal Reserve will again cut rates by 50 basis points this month.
The dollar index is set for its biggest weekly fall since May 2016, down more than 2% since Monday.
“The driver is the equity markets and the collapse in U.S. bond yields this week,” said Kenneth Broux, FX strategist at Societe Generale. “It’s been a knee-jerk reaction. What we have now is a reversal simply on the declining U.S. equities and the compressing differential.
“The reality is the Fed has taken on more insurance ... No-one knows how long this (the coronavirus outbreak) will last, but taking a step back, I would expect the dollar to bounce.”
Currency volatility gauges rose on Friday, with one-month euro-dollar implied volatility reaching it highest since November 2018.
ING analysts said they were targeting $1.15 per euro in the coming weeks as aggressive U.S. rate cuts contrasted with the limited room for action at the European Central Bank. Fed fund futures were pricing in about 90 basis points of further easing by the end of the year.
“For now, expect USD weakness vs G10 FX to continue, and the G10 FX segment outperforming EM FX, with carry trades under pressure,” they said in a research note.
The euro rose 0.7% to as high as $1.13405, its strongest since July. It was stuck below $1.08 only a few weeks ago.
The dollar index fell 0.7% to a daily low of 95.795, its weakest since July.
Against the yen, the dollar dropped more than 1% and below 105 yen, before recovering. It was last up at 105.25 yen. The yen is benefiting both from dollar weakness and its reputation as a safe haven.
The dollar also shed more than 1% against the Swiss franc, considered a safe haven, to its weakest since early 2018 .
The dollar was not weaker everywhere. It has held up against emerging-market currencies, those exposed to commodities such as the Canadian, Australian and New Zealand dollars and against Asia currencies, where the coronavirus economic effect is pronounced.
The crude-oil linked Norwegian crown suffered. The euro rocketed to a record high versus the crown, up 0.4% on the day at 10.4855 crowns.
The euro fell against the Swiss franc, however, dropping 0.3% to 1.0585 francs.
Sterling seized on the dollar’s spiral downwards, hitting a day’s high of $1.3026 before settling at $1.2991.
Editing by Larry King, Robert Birsel; editing by Larry King