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FOREX-Euro set for biggest weekly drop in 3 weeks as yields fall

Saikat Chatterjee

* Graphic: World FX rates in 2019

LONDON, July 5 (Reuters) - The euro edged lower on Friday and is on track for its biggest weekly drop in three weeks as a slide in core government bond yields ramped up pressure for fresh stimulus policies from global central banks.

Germany's 10-year Bund yield breached the European Central Bank's deposit rate of -0.40%, a level analysts say acts as a psychological barrier even though shorter-dated German bond yields already trade well below it.

But despite the relentless drop in yields, the single currency has been relatively well supported at around $1.12, a level it has traded above since early June and 1.5% above a 2019 low of $1.1055 hit in late May.

Analysts say the euro's surprising strength is due to concerns that any stimulus from the European Central Bank after years of negative policy rates and multiple rounds of bond purchases may be dwarfed by likely big rate cuts from the Fed.

"Although I would by no means rule out the possibility that the ECB may once again conjure up an expansionary surprise, in the medium term, it may find it difficult to overcompensate for the Fed's significant scope for interest rate cuts," Commerzbank strategists said ii a note.

On Friday, the single currency edged 0.1% lower at $1.1273 and is on track for a weekly loss of 0.8% versus the dollar, its biggest weekly loss since mid-June.

Expectations of big U.S. rate cuts will not be shaken by jobs data due later, with economists polled by Reuters predicting U.S. non-farm payrolls to have increased by 160,000 in June from 75,000 in May.

The dollar index against a basket of six major currencies stood little changed at 96.823, having spent the previous day in a tight range as U.S. financial markets were closed for the Independence Day holiday.

The Australian dollar was a shade weaker at $0.7016 after climbing to a two-month high of $0.7048 the previous day.

The Aussie has advanced 1.4% this week with expected rate cuts from the Fed and the ECB helping shift some of the focus away from the Reserve Bank of Australia's own easing bias.

The pound struggled near a two-week low of $1.2557 plumbed on Wednesday. (Reporting by Saikat Chatterjee; Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Catherine Evans)