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GBP, JPY down 1% each against dollar

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

worries

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Higher Treasury yields support dollar

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Key U.S. data due this week

(Updates throughout)

By Jaspreet Kalra and Gregor Stuart Hunter

SINGAPORE, Sept 2 (Reuters) - Sterling and the Japanese

yen slumped on Tuesday on the back of growing investor anxiety

about government finances, allowing the dollar to claw back some

ground after five days of selling.

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.

Sterling fell 1.1% to $1.1396, its lowest level since August

22, while the dollar firmed by 1% to 148.64 yen.

The euro firmed against both sterling and yen

by 0.5% and 0.3%, respectively.

While sterling was weighed down by lingering worries over

the UK'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 speeding up the

UK economy.

For the Japanese yen, heightened political uncertainty is

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

signal from Deputy Governor Ryozo Himino on Tuesday will

encourage speculators to continue rebuilding short yen

positions, Hardman said.

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

yields as investors hone in on key U.S. labour market data due

this week for cues on the path of benchmark interest rates.

Against a basket of major currencies, the dollar was

up 0.7% at 98.3.

The interest rate expectations-sensitive 2-year U.S.

Treasury yield was up 2 bps at around 3.6474% after

hitting its lowest level since May last week. U.S. markets were

shut on Monday for the Labour Day holiday.

Money markets are currently pricing in a near 90% chance

that the Fed will cut rates by 25 basis points this month, but

those wagers could be tested by U.S. economic data due this

week.

Data due this week include ISM's manufacturing and services

purchasing managers' indices and the non-farm payrolls report.

While the data is likely to cement expectations of a rate

cut by the Fed, it's unlikely to cause a sharp move lower in the

dollar beyond the knee-jerk reaction, said Jane Foley, head of

FX strategy at Rabobank.

Spot gold, meanwhile, steadied after touching an

all-time high and was last $3,477 per troy ounce.

(Reporting by Gregor Stuart Hunter; Editing by Christopher

Cushing, Sonali Paul and Ros Russell)