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FOREX-Euro falls to a 16-month lows on gloomy outlook; pound sinks

Saikat Chatterjee

(Updates prices)

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

LONDON, Sept 2 (Reuters) - The euro plunged to a 16-month low on Monday as the impact of Washington and Beijing's trade war on the European economy dominated investor sentiment while the pound tanked on speculation that Britain may be headed for a general election.

Germany's export-dependent manufacturing sector remained in contraction in August as weaker demand pushed companies to scale back production and cut jobs.

With its sales abroad hit by a worsening trade climate, a global economic slowdown and an increasingly chaotic run-up to Brexit, most of Germany's growth momentum and consequently Europe's growth outlook has cratered.

The United States began imposing 15% tariffs on a variety of Chinese goods on Sunday -- including footwear, smart watches and flat-panel televisions -- while China started putting new duties on U.S. crude oil.

"There are very few places in the currency market world to hide if trade tensions escalate, with emerging market currencies and the euro particularly vulnerable because of their trade linkages," said Timothy Graf, head of macro strategy at State Street Global Advisors in London.

The euro was 0.3% lower versus the dollar at $1.0958 after falling below $1.10 on Friday for the first time since May 2017.

The euro's more than 4% slide this year is a big reversal in fortunes for the single currency after ECB chief Mario Draghi first indicated a likely pullback in its extraordinary stimulus policies in a speech in Sintra in June 2017.

But since then an escalation in trade tensions between the United States and China, plus a growing swathe of government bond yields sinking into negative territory thanks to a worsening economic outlook, has sapped demand for the euro.

Money markets were assigning a bigger probability of a 20 basis point rate cut on Monday by the ECB this month.

Though latest futures data indicated that net hedge fund positions in the single currency are broadly at neutral levels, they are quite some way from record high levels seen last year.

The pound led losers against a broadly firm greenback after British media said Prime Minister Boris Johnson had called an emergency cabinet meeting and was preparing to call a general election.

Against the dollar, the British currency tanked 1% to $1.12046 and weakened 0.6% vs the euro to 90.93 pence.

YUAN PRESSURE

With U.S. markets shut for a holiday on Monday, investors remained on the sidelines while looking to see what expansionary policies the European Central Bank and the U.S. Federal Reserve could unveil this month.

The Chinese yuan was fragile after registering its biggest monthly slide in 25 years in August as the trade tensions intensified.

While non-deliverable forwards for the Chinese currency on one-year maturities held below a January 2017 high of above 7.24 yuan per dollar hit last month, daily volatility has picked up, indicating that traders are wary about the outlook for the currency.

"The trade war appears to have ushered in a complex and prolonged geopolitical & economic rivalry between the U.S. and China, which is unlikely to subside on either side of the 2020 US elections," strategists at BMO said in a note.

Broader market sentiment remained on the back foot too, with net positions in the Japanese yen creeping up to the highest levels in nearly three years.

Elsewhere, the dollar index which measures the greenback's performance against a basket of six major currencies firmed 0.2% at 99.13.

(Reporting by Saikat Chatterjee; Editing by Catherine Evans)