FOREX-Yen holds gains, traders seek safety as Treasury market sounds recession alarm

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* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

* Yield-curve inversion latest sign of economic trouble

* Yen, Swiss franc benefit from safe-haven flows

By Stanley White

TOKYO, Aug 15 (Reuters) - The yen held gains against majorcurrencies on Thursday as sliding Treasury yields fanned fearsof a severe global economic downturn and drove investors intosafe-haven assets.

The latest turbulence in financial markets was triggered byan inversion in the U.S. Treasury yield curve US2US10=TWEB forthe first time in 12 years, which helped lift gold prices anddrove a massive sell-off in U.S. stocks and oil.

The inversion, where 2-year yields trade higher than10-year yields, has historically preceded previous economicrecessions.

Underscoring the worrying signs, 10-year Treasury yieldsslumped to the lowest in three years in Asian trade while30-year Treasury yields broke below 2%, which took the entireyield curve below the floor for the Federal Reserve's policyrate.

Sentiment was already fragile after economic data from Chinaand Germany revealed the extent of the damage the U.S.-Sinotrade war is causing to two of the world's largest exporters.

In this dim economic environment, analysts expect safe-havencurrencies, gold, bonds and other low-risk assets to continue toget a boost.

"When volatility rises, dollar/yen becomes stronglycorrelated with Treasury yields, so the currency pair has moreroom to fall," said Junichi Ishikawa, senior foreign exchangestrategist at IG Securities in Tokyo.

"I expect other safe havens to rise. The mood is downbeat,because of the trade war and bad economic data."

The dollar was little changed at 105.90 yenJPY=EBS inAsian trading Thursday. On Wednesday, the yen rallied 0.8%versus the greenback, its biggest daily gain in two weeks.

The dollar index .DXY , which measures its value against abasket of six major currencies, stood at 97.914 after a 0.2%gain on Wednesday.

U.S. bonds remained well bid in Asian trade. The 10-yearTreasury yields skidded to the lowest since September 2016 and30-year Treasury yields extended their rapid decline, plungingto an all-time low of 1.9649%.

Spot gold XAU= , which is usually bought in times ofeconomic uncertainty, rose 0.3% toward the highest in six years.

Against the dollar, the Swiss franc CHF=EBS last traded at0.9735, holding on to a 0.3% gain posted on Wednesday.

Investors had plenty of reasons to stay away from riskierassets.

Ten weeks of increasingly violent clashes between police andprotesters in Hong Kong have plunged the city into its worstcrisis since it reverted to China from British rule in 1997,which could lead to more risk aversion in the currency market.

U.S. President Donald Trump on Wednesday tied a U.S. tradedeal with China to a humane resolution to the protests, raisingthe stakes in a wide-ranging standoff with China over its tradeand industrial policies. urn:newsml:reuters.com:*:nL2N25A0YU

More protests are planned on Friday and over the weekend indifferent areas of Hong Kong.

Sterling was little changed at $1.2069. The pound has beenhemmed into a tight trading range recently due to lingeringuncertainties about whether Britain will exit the European Unionwithout transitional trading agreements.

Data on British retail sales are due later Thursday, whichmay provide further clues about how consumers are coping with heightened concerns about Brexit.

The Australian dollar AUD=D3 rose 0.5% to $0.6786 afterdata showed the Australian economy added a forecast-busting41,100 new jobs in July.

However, reflecting the rising global economic risks,futures still imply an 84% chance of a quarter point rate cut to0.75% in October, with November seen better than 100%.

RBA Deputy Governor Guy Debelle also highlighted the risksfrom the trade war in a speech earlier on Thursday, warning itcould trigger a self-fulfilling global downturn. urn:newsml:reuters.com:*:nS9N23B01A (Reporting by Stanley White; editing by Richard Pullin, SamHolmes & Shri Navaratnam) ((stanley.white@thomsonreuters.com; +81 3 6441 1984twitter.com/stanleywhite1;))

This article appears in: Politics , Stocks , World Markets
Referenced Symbols: EUR

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