FOREX-Dollar on defensive as U.S. bonds surge on Fed rate cut prospects

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
* Dollar sags with benchmark US yield sliding to 21-mth low
* Sharp drop in US yields negates dollar's safe-haven status
* Focus for Aussie on RBA policy decision at 0430 GMT
* RBA seen cutting rates, focus on potential hints of more
easing

By Shinichi Saoshiro
TOKYO, June 4 (Reuters) - The dollar was on the defensive on
Tuesday after taking a beating against peers such as the euro
and yen, hurt by a sharp slide in U.S. Treasury yields as
traders raised their bets for a near-term rate cut by the
Federal Reserve.
The benchmark 10-year Treasury yield US10YT=RR fell to its
lowest level since September 2017 overnight, coming within reach
of the 2% threshold after St. Louis Federal Reserve President
James Bullard said a rate cut "may be warranted soon" given the
rising risk to economic growth posed by global trade tensions as
well as weak U.S. inflation. Treasury yields had already been on a steep decline as
investors have been piling into safe-haven government bonds in
the face of escalating trade tensions between Washington and its
trade partners.
The dollar traded little changed at 108.045 yen JPY= after
brushing 107.885 overnight, its lowest since early January.
The euro nudged up 0.1% to $1.1250 EUR= after rallying
roughly 0.7% overnight to $1.1262, its highest since May 13.
"The dollar is even falling against currencies such as the
euro. Participants have found an incentive to finally cover euro
shorts on the sharp fall in U.S. yields," said Yukio Ishizuki,
senior currency strategist at Daiwa Securities.
"The dollar has been a safe-haven during the current 'risk
off' phase, but it's strength is waning as the unexpected pace
of the drop in U.S. yields has become too much to ignore."
The dollar index against a basket of six major currencies
.DXY was steady at 97.220 after shedding 0.6% the previous
day.
The Australian dollar AUD=D4 was a shade lower at $0.6971
after climbing to a three-week peak of $0.6983 the previous day
in the wake of the broadly weaker greenback.
Immediate focus was on the Reserve Bank of Australia's (RBA)
policy decision at 0430 GMT, when it is widely expected to cut
its cash rate to an all-time low of 1.25%.
With a policy easing largely priced in, traders are keenly
waiting on the RBA's statement for any hint of further rate
cuts.
Financial markets are fully pricing in a second cut by the
RBA in September and see a 50-50 chance for a third move by
Christmas. AUD/
The pound GBP=D4 was flat at $1.2665, having crawled off a
five-month trough of $1.2560 set on Friday thanks to the
dollar's underperformance.
Sterling had sunk to the five-month low, weighed by the
prospect of Britain choosing a eurosceptic prime minister who
could take a hard line on Brexit.

(Editing by Shri Navaratnam)