FOREX-Euro weakens vs dollar as Treasury yields pick up on stimulus talks

* Chinese yuan matched earlier a six-day low vs dollar
* Pound weaker against the euro, stable vs dollar
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Olga Cotaga
LONDON, Aug 20 (Reuters) - The euro hovered around a
two-week low versus the dollar as the U.S. currency held strong
on Tuesday, boosted by slightly higher Treasury yields, while
political uncertainties in Italy also kept the common currency
subdued.
Yields on U.S. benchmark 10-year government bonds pulled
away from three-year lows US10YT=RR , helped in part by the
prospect of Germany ditching its balanced budget rule to boost
spending and on more economic support measures by China.
Yields fell last week to cause an inversion of the
short-dated and long-dated yield curve, sending alarms through
financial markets given that several recessions in the past have
been preceded by yield curve inversions. The curve of the
two-year and 10-year Treasury yields was slightly steeper on
Tuesday US2US10=RR .
"The dollar is higher across the board, tracking the rebound
in yields. The prospect of Germany embarking on stimulus was the
turning point and the dollar has regained momentum since," said
Yukio Ishizuki, senior currency strategist at Daiwa Securities.
The dollar index was flat at 98.385 .DXY after rising to a
two-and-a-half week high of 98.40 earlier.
The euro was also flat at $1.1078 EUR=EBS , but not far
from the $1.1066 low it reached on Friday on lingering concerns
over political developments in Italy.
Prime Minister Giuseppe Conte is set to address parliament
on Tuesday afternoon (1300 GMT) to defend his record. He might
hand in his resignation immediately afterwards or could instead
wait for a formal vote to make it clear he is being unseated by
the far-right League. A vote has not yet been scheduled and
there is widespread uncertainty over how the political turmoil
will end
Deputy Prime Minister Matteo Salvini pulled the plug on the
ruling coalition Movement earlier this month, hoping to trigger
early elections that would likely see him crowned as prime
minister.
"The possible success of the no-confidence vote in Italy
today could push euro/dollar towards and even below the
psychological 1.1000 level today," said Chris Turner, head of
forex strategy at ING.
"Though falls are unlikely to meaningful or persistent," he
said, "because the negative spillover into the euro from periods
of political uncertainty in Europe has been somewhat limited
over the past year."
Elsewhere, a stronger dollar pushed the offshore Chinese
yuan lower to have it match a six-day low of 7.0770 against the
greenback earlier, though China's offshore yuan was last trading
neutral at 7.0708 CNH=EBS .
The pound was down by 0.3% both against the dollar and the
euro, last at $1.2092 GBP=D3 and at 91.55 pence against the
euro EURGBP=D3 .
British Prime Minister Boris Johnson made new waves by
writing to European Council President Donald Tusk on Monday to
propose replacing the Irish backstop with a commitment to put in
place alternative arrangements by the end of a post-Brexit
transition period. Johnson will meet both French President Emmanuel Macron and
German Chancellor Angela Merkel during the week and is also
planning to meet Ireland's Prime Minister Leo Varadkar in
September.
Market focus should shift to the annual symposium of global
central bankers starting on Friday at Jackson Hole, Wyoming.