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FOREX-Dollar edges higher on trade, Brexit worries

Richard Leong

* Pound recovers after dropping below $1.20 on Brexit jitters

* Dollar index hits highest level since May 2017

* U.S. factory sector contracts for first time since 2016 - ISM

* U.S. Treasury yields fall toward recent mid-2016 low

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

(Updates market action, changes dateline, previous LONDON) NEW YORK, Sept 3 (Reuters) - The dollar climbed on Tuesday to its strongest level in over two years against a basket of currencies as traders favored the greenback on worries about U.S.-China trade tensions and a chaotic British exit from the European Union. The dollar's initial gains abated in the wake of a private report that showed the U.S. manufacturing sector recorded its first monthly contraction since 2016 in August. Last month's steeper-than-expected decline in the factory activity index from Institute for Supply Management also touched off a rally in the U.S. bond market, sending benchmark 10-year yields to their lowest levels since July 2016.

"This is a safe-haven trade rather than a rate-differential trade," said Steven Englander, global head of G10 FX research at Standard Chartered in New York. Bloomberg News reported that Chinese and U.S. officials are struggling to agree on a schedule for a round of trade negotiations that had been expected this month. UK Prime Minister Boris Johnson lost his working majority in parliament when one of his Conservative lawmakers defected to the pro-European Union Liberal Democrats. At 11:44 a.m. (1544 GMT), an index that tracks the dollar versus six major currencies was up 0.11% at 99.022. It hit 99.37 earlier Tuesday, which was its highest since May 2017. The euro stabilized after tumbling to a 28-month low against the dollar earlier Tuesday as investors priced in deeper negative interest rates for longer in the euro zone. Money markets have increased to more than 80% the probability that the European Central Bank will cut its benchmark rate by 20 basis points when it meets next week. The ECB benchmark rate now stands at minus 0.40% and it has all but promised a monetary policy stimulus package as economic growth falters. Monday's PMI survey showed European manufacturing contracted for seven straight months. The euro was little changed on the day at $1.09645. It fell to $1.0926 earlier, its lowest since mid-May 2017. A break below the key $1.1000 level last week had sparked heavier sell-offs. The dollar weakened against the yen and the Swiss franc in the aftermath of disappointing ISM manufacturing data. The greenback fell 0.37% to 105.87 yen and decreased 0.31% to 0.98735 franc. Sterling was last up 0.2% at $1.2087 after falling to $1.1959, the lowest since October 2016, when it plunged to $1.1491 in a flash crash. Against the euro, sterling rose to 90.7 pence, rebounding from a two-week low of 91.47 pence .

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Currency bid prices at 11:43AM (1543 GMT)

Description RIC Last U.S. Pct Change YTD PctHigh Bid Low BidClose Change

Previous Session

Euro/Dollar EUR= $1.0964 $1.0966 -0.02% -4.40%+1.0978 +1.0927Dollar/Yen JPY= 105.8700 106.2100 -0.32% -3.99%+106.3800 +105.7500Euro/Yen EURJPY= 116.07 116.49 -0.36% -8.04%+116.5600 +115.8800Dollar/Swiss CHF= 0.9874 0.9905 -0.31% +0.61%+0.9928 +0.9865Sterling/Dolla GBP= 1.2090 1.2066 +0.20% -5.23%+1.2102 +1.1959

r

Dollar/Canadia CAD= 1.3331 1.3325 +0.05% -2.24%+1.3382 +1.3323

n

Australian/Dol AUD= 0.6756 0.6713 +0.64% -4.16%+0.6758 +0.6688

lar

Euro/Swiss EURCHF= 1.0828 1.0866 -0.35% -3.79%+1.0869 +1.0821Euro/Sterling EURGBP= 0.9067 0.9091 -0.26% +0.91%+0.9148 +0.9052NZ NZD= 0.6323 0.6306 +0.27% -5.87%+0.6326 +0.6270

Dollar/Dollar

Dollar/Norway NOK= 9.1054 9.1003 +0.06% +5.38%+9.1632 +9.0986Euro/Norway EURNOK= 9.9833 9.9832 +0.00% +0.78%+10.0213 +9.9790Dollar/Sweden SEK= 9.8420 9.8274 +0.13% +9.80%+9.8934 +9.8239Euro/Sweden EURSEK= 10.7937 10.7799 +0.13% +5.16%+10.8225 +10.7709

(Reporting by Richard Leong; Additional reporting by Olga Cotaga in LONDON Editing by Frances Kerry and Lisa Shumaker)