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FOREX-Euro slides to 28-month low as ECB stimulus eyed; pound sinks

Olga Cotaga

* The pound drops below $1.20 on Brexit clash

* Offshore Chinese yuan hits record low on trade worries

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

LONDON, Sept 3 (Reuters) - The euro touched a 28-month low against the dollar on Tuesday as investors priced in deeper negative interest rates for longer in the euro zone.

Money markets has ratcheted up to 83% the probability that the European Central Bank will cut its benchmark rate by 20 basis points when it meets next week. It now stands at minus 0.40%.

The ECB has also all but promised a monetary policy stimulus package, including new quantitative easing, as economic growth falters and Germany's manufacturing drops into recession.

A survey on Monday showed European manufacturing contracted for seven straight months, reinforcing expectations the ECB will ease its policy.

The euro was last down by 0.3% at $1.0937. It fell to $1.09305 in Asian trade, its lowest since mid-May 2017, after breaking below the key $1.1000 level last week.

The euro could get some relief if the Five Star Movement and the Democratic Party form a coalition government in Italy, analysts said. Five-Star members will vote on Tuesday on forming a coalition with PD.

"If the vote succeeds, the euro could gain somewhat," MUFG analysts said in a note, adding that "Italian assets like bonds and stocks would likely rally somewhat further."

The pound fell to its lowest in nearly three years on Tuesday as British lawmakers prepared to vote on the first stage of their plan to block Prime Minister Boris Johnson from pursuing a no-deal Brexit. and

Sterling was down 0.7% at $1.1963 after falling to $1.1959, the lowest it has been since October 2016, when it plunged to $1.1491 in a flash crash.

Against the euro, sterling touched a two-week low of 91.47 pence.

"The pound is being sold all over the place, because the political risk has forced us to recognise that a no-deal Brexit is possible," said Junichi Ishikawa, senior foreign exchange strategist at IG Securities in Tokyo. "At this point, I see no reason to stay long in sterling."

Elsewhere, the Chinese yuan was 0.1% stronger at 7.1865 yuan against the dollar. It reached a record low of 7.1975 in early offshore trade after Bloomberg News reported that Chinese and U.S. officials were struggling to agree a schedule for trade talks that had been expected this month.

(Reporting by Olga Cotaga, additional reporting by Stanley White in Tokyo, editing by Larry King)