UPDATE 1-Politics closes gulf between U.S. and German bond markets

(Adds quote, updates prices)

LONDON, May 17 (Reuters) - The gap between U.S. and German government borrowing costs reached its narrowest in more than six months on Wednesday as a week of tumult at the White House contrasted with a sense of improved political stability in Europe.

This has started to partly reverse a trend that began during the euro zone debt crisis of 2011/2012, where the single currency bloc and the United States' economic paths appeared to diverge.

But reports this week that Donald Trump tried to interfere with a federal investigation and discussed sensitive security information with Russia has fuelled concern among investors that he may be distracted from pushing through economic stimulus plans.

These fears have even started to dent firm expectations that the U.S. Federal Reserve will raise interest rates next month.

The euro zone is no stranger to political upheaval, but with a number of countries having fended off far-right and eurosceptic challenges in votes this year, there appears to be a renewed sense of unity within the bloc.

"At the moment everyone is focusing on the political relief in Europe and the political unrest in the U.S.," ING's senior rates strategist Martin van Vliet said. "But the market is quite binary, so it is dangerous to assume this will last forever."

U.S. 10-year yields dropped 4 basis points on Wednesday to 2.29 percent while German equivalents were 2 bps lower at 0.41 percent. At 188 bps, the gap between the two benchmarks was the lowest since Nov. 14.

This gulf was also evident in currency markets, with the euro climbing to its highest since Nov. 7 against the dollar.


U.S. President Donald Trump asked then-FBI Director James Comey to end the agency's investigation into ties between former White House national security adviser Michael Flynn and Russia, according to a source who has seen a memo written by Comey.

The explosive new development on Tuesday followed a week in which Trump fired Comey and then discussed sensitive national security information about Islamic State with Russian Foreign Minister Sergei Lavrov.

Coupled with a string of disappointing economic data, the political uncertainty has reduced expectations for a U.S. rate hike in June from over an 80 percent chance last week to below 70 percent on Wednesday, according to CME's FedWatch tool.

Meanwhile in Europe, new French President Emmanuel Macron and German Chancellor Angela Merkel on Monday agreed to draw up a roadmap to deeper European Union integration and opened the door to changing the bloc's treaties to facilitate ambitious reform.

Spain added its voice to calls for deeper integration on Tuesday.

Although other political tests will come in Germany, Austria and possibly Italy later this year, for now investor attention has shifted to the outlook for monetary policy.

Many analysts expect the ECB to scale back its bond-buying quantitative easing scheme by the end of the year, and to signal its intent possibly as soon as next month. They expect interest rate rises to follow in 2018. (Reporting by John Geddie; Editing by Hugh Lawson)