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FOREX-Dollar holds up near 2-year peak on trade-war, growth worries

Daniel Leussink

* Chinese diplomat ramps up rhetoric in trade war with U.S.

* Dollar just below two-year peak brushed last week

* 2nd estimate of U.S. Q1 GDP in focus

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

TOKYO, May 30 (Reuters) - The dollar held up against its key rivals on Thursday after fears of an escalation in the Sino-U.S. trade standoff forced investors to take shelter in safe-haven assets, including government bonds.

As the dispute between the world's two biggest economies showed no signs of abating, worries that global growth will be hurt have rippled through financial markets in recent sessions, with riskier assets in particular taking the brunt of selling.

Against a basket of six major currencies, the dollar was basically flat at 98.128, hovering within reach of a two-year high of 98.371 brushed a week ago. The index is up more than 2% for the year.

"The outlook for global growth, and any drag from the festering trade dispute, remain key issues for markets," said Michael McCarthy, Sydney-based chief market strategist at CMC Markets.

"The data over the next twenty-four hours has potential to either confirm or dispel the gloom," he wrote in a note.

Offering the latest sign the standoff between Washington and Beijing is far from ending, Chinese Vice Foreign Minister Zhang Hanhui said on Thursday that provoking trade disputes is "naked economic terrorism", ramping up the rhetoric against the United States.

Chinese newspapers had warned the day before that Beijing could use rare earth elements to strike back at the United States after U.S. President Donald Trump said he was "not yet ready" to make a deal with Beijing over trade.

Investor focus is now on U.S. data for an indication about the state of the world's top economy, with market participants awaiting the second estimate of first-quarter gross domestic product growth figures and U.S. weekly jobless claims.

"As the United States isn't likely to fall into a recession anytime soon, there's a likelihood that risk sentiment may improve based on the economy's strength," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

The dollar held mostly steady even after benchmark 10-year U.S. Treasury yields hit as low as 2.210% overnight, their lowest since the middle of September 2017.

The greenback's status as the world's reserve currency tends to attract safe haven bids in times of market turmoil and political tensions. The U.S. 10-year yield was last at 2.267%.

The dollar was also underpinned by weakness in the euro on fresh signs of political tensions between Italy and the European Union.

The European Commission wrote on Wednesday to the Italian government asking it to explain a deterioration in the country's public finances, a move that sets the stage for a possible legal clash with the eurosceptic coalition in Rome.

The single currency on Thursday tacked on almost a tenth of a percent to $1.1138, recovering somewhat after giving up 0.8% in three straight losing sessions.

The Australian dollar added 0.15% to $0.6926.

Elsewhere in the foreign exchange market, the dollar was steady at 109.59 yen, about 0.5% above a more than three-month low of 109.02 yen touched on May 13.

Analysts said the yen, another safe-haven asset backed by Japan's status as the world's biggest creditor nation, remained relatively weak due to domestic investors' demand for dollars.

"As there's persistent yen-selling and dollar-buying from Japanese investors when the rate approaches the 109.10 yen per dollar level, it's not easy for the yen to rise above the 109 level," said Yukio Ishizuki, senior currency strategist at Daiwa Securities. (Editing by Shri Navaratnam and Jacqueline Wong)