FOREX-Euro and yen surge as Treasury yield collapse whacks dollar

* Euro, yen hit highs vs dollar overnight
* Tumbling Treasury yields blunt U.S. rate advantage
* Dollar on course for worst week since May 2016
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Tommy Wilkes and Iain Withers
LONDON, March 6 (Reuters) - The euro roared past $1.13 on
Friday and the yen pushed below the 105 level, as a dramatic
collapse in U.S. government bond yields sent the dollar on
course for its worst week since 2016.
Investors have slashed their expectations for U.S. interest
rates following an emergency Federal Reserve 50 basis point cut
this week.
That is wiping away the yield advantage that had fuelled one
of the popular carry trades globally - borrowing at negative
rates in the euro and yen to buy U.S. assets.
Markets now bet the Federal Reserve will have to cut rates
by 50 basis points for a second time this month. FEDWATCH
The greenback index is set for its biggest weekly fall since
May 2016, down more than 2% since Monday =USD .
"The driver is the equity markets and the collapse in U.S.
bond yields this week," said Kenneth Broux, FX strategist at
Societe Generale.
"It's been a knee-jerk reaction. What we have now is a
reversal simply on the declining U.S. equities and the
compressing differential.
"The reality is the Fed has taken on more insurance ...
No-one knows how long this (the coronavirus outbreak) will last
but taking a step back I would expect the dollar to bounce."
Choppy global markets led currency volatility gauges to rise
on Friday, with one-month euro-dollar implied volatility hitting
the highest since November 2018. ING analysts said they were targeting $1.15 per euro in the
coming weeks as aggressive U.S. rate cuts contrasted with the
limited room for action at the European Central Bank. Fed fund
futures 0#FF: were pricing in about 90 basis points of further
easing by the end of the year.
"For now, expect USD weakness vs G10 FX to continue, and the
G10 FX segment outperforming EM FX, with carry trades under
pressure," they said in a research note.
The euro gained 0.7% to as high as $1.1324 EUR=EBS , its
strongest since July.
The single currency was stuck below $1.08 last month.
The dollar index skidded 0.7% to 95.892 =USD , its weakest
since July.
Against the yen, the dollar dropped more than 1% and below
105 yen JPY=EBS . The yen is benefiting both from dollar
weakness and its reputation as a safe haven.
The dollar was not weaker everywhere, however. It still
holds safe-haven status compared with emerging-market
currencies, those exposed to commodities such as the Canadian
CAD=D3 and Australian AUD=D3 and New Zealand dollars
NZD=D3 and versus Asian currencies, where the coronavirus
economic effect is pronounced.
Sterling seized on the dollar's spiral downwards, hitting
$1.3015 GBP=D3 before settling at $1.2987.

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(Editing by Larry King, Robert Birsel)