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Sterling, yen fall against dollar

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Britain, France bond yields at multi-year highs on fiscal

worries

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Higher Treasury yields support dollar

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Key US data due this week

(Updates for U.S. afternoon)

By Alden Bentley and Jaspreet Kalra

NEW YORK/MUMBAI, Sept 2 (Reuters) - Sterling and the

Japanese yen slumped on Tuesday on growing investor anxiety

about government finances, allowing the dollar to claw back some

ground, while traders looked toward Friday's U.S. jobs report

for signals on the greenback's next turn.

Renewed pressure on bond markets, with Britain's 30-year

borrowing costs rising to their highest levels since 1998,

spilled over into currency markets, while gold hit fresh record

highs.

"Negative developments outside of the U.S. are probably

what's driving the market today, in terms of dollar strength,"

said Vassili Serebriakov, FX strategist at UBS in New York.

U.S. payrolls data to be released on Friday is likely to

determine the path of the dollar in coming weeks, he added.

Sterling fell to a 3-1/2 week low and was 1.24%

lower in afternoon trade at $1.3375. The dollar strengthened

0.84% to 148.40 yen, hitting its highest against the

Japanese currency since August 1.

The euro fell 0.61% to $1.1637.

While worries about fiscal issues overseas were the main

drivers when U.S. markets reopened after the Labor Day holiday,

markets also keyed in on late Friday's U.S. appeals court ruling

that most of President Donald Trump's tariffs are illegal. The

divided court allowed for the tariffs to remain until October

14, to give the administration a chance to file an appeal with

the Supreme Court.

Also, the return of the U.S. Congress on Tuesday leaves

less than a month to pass legislation that would keep federal

agencies funded and avert a partial government shutdown.

The midmorning release of a slightly

weaker-than-expected ISM manufacturing PMI did not elicit much

response in the forex market, with Friday's August non-farm

payrolls the main focus of the week.

While sterling was weighed down by lingering worries

over Britain's fiscal position ahead of a budget later this

year, dovish-leaning remarks from a Bank of Japan official and

the resignation of a key ruling party official pulled down the

yen.

"Sterling's underperformance is reflecting the growing

concerns over the fiscal situation as we move closer to the

budget and it becomes a bigger focus for market participants,"

said Lee Hardman, senior currency analyst at MUFG.

Finance minister Rachel Reeves is expected to raise taxes in

her autumn budget in order to remain on course for her fiscal

targets, potentially adding to the challenge of boosting growth.

For the Japanese yen, heightened political uncertainty was

likely to remain a drag, while the lack of a hawkish policy

signal from Deputy Governor Ryozo Himino on Tuesday would

encourage speculators to continue rebuilding short yen

positions, Hardman said.

The dollar drew some support from an uptick in U.S. Treasury

yields amid a broad bond market shakeout, with investors looking

to the jobs report for cues on the path of benchmark interest

rates.

The buck has trended lower all year, and lost more than

2% in August. Against a basket of major currencies, it

was up 0.74% Tuesday afternoon, at 98.37.

Money markets are currently pricing in a 91% chance

that the U.S. Federal Reserve will cut rates by 25 basis points

this month, but those wagers could be tested by U.S. economic

data lined up this week.

Concerns about the independence of the Fed have also been in

focus for investors in light of Trump's repeated push for lower

policy rates and his move to fire Fed Governor Lisa Cook over

allegations of mortgage fraud, which she denies.

Elsewhere, data released on Friday showed that euro zone

inflation edged up in August but remained close to the European

Central Bank's 2% target, likely reinforcing market expectations

that the ECB will keep benchmark rates unchanged in the near

term.

Spot gold, meanwhile, steadied after touching an

all-time high and was last up 1.59% at $3,531.08 a troy ounce.