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FOREX-Dollar holds up on trade, European political worries; U.S. yields fall

Daniel Leussink

* Euro bounces slightly after shedding nearly 0.3% overnight

* U.S. 10-yr Treasury yields at the lowest since Sept. 2017

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

TOKYO, May 29 (Reuters) - The dollar managed to hold on to most of its overnight gains on Wednesday after investors scooped up safe-haven assets, including U.S. Treasuries, on lingering fears of a further escalation in the Sino-U.S. trade dispute.

Losses in the euro in the previous session also helped support the dollar, as analysts warned of more risks for the single currency on uncertainty surrounding the euro zone economy and the bloc's political future.

"It looks like there has been a real surge in U.S. Treasuries," said Nick Twidale, chief operating officer at Rakuten Securities Australia in Sydney.

"We're probably going to see some catch-up in the foreign exchange market over the next few sessions," Twidale said, adding that he expected safe-haven currencies such as the Japanese yen and the Swiss franc to be in demand.

Against a basket of six peers, the dollar was down less than 0.1% at 97.897, having ended up 0.3% overnight. The index was trading about 0.5% off a two-year high of 98.371 hit on Thursday and is still up 1.8% for the year.

The dollar held mostly steady even after benchmark 10-year U.S. Treasury yields hit as low as 2.243%, their lowest since September 2017. The greenback's own status as a safe-haven helped amid worries about the trade tensions and Italy's budget policy. The U.S. 10-year yields were last at 2.253%.

The euro edged up 0.1% to $1.1167, bouncing slightly after shedding nearly 0.3% during the previous session. The common currency remained not far off a near two-year low of $1.11055 brushed on Thursday.

European Union leaders are set to begin the process of filling a number of top EU posts, from the head of the European Commission to the European Central Bank.

"The reason we've seen the euro drop off is because the European zone in particular has been threatened by and troubled by the trade concerns," said Rakuten's Twidale.

"On the back of that, we also had those European elections so there's a lot of political instability in Europe," he added. "That's putting pressure on the currency."

Italian Deputy Prime Minister Matteo Salvini, whose far-right League triumphed in European elections on Sunday, said the European Commission could fine Italy 3 billion euros for breaking EU debt and deficit rules, a comment that weighed on the single currency.

The yen was 0.15% stronger at 109.22 per dollar on the lower U.S. yields and after U.S. President Donald Trump said on Monday he expected Japan and the United States to announce a trade agreement "probably in August."

The yen, which tends to draw steady support from a flight-to-safety bid during geopolitical or financial stress as Japan is the world's biggest creditor nation, remained just 0.2% above a three-month high of 109.02 yen touched on May 13.

The Australian dollar inched up to $0.6929, about 0.9% off a recent trough of $0.6865.

(Editing by Shri Navaratnam)