* Dollar higher, yuan weaker on Trump tariff threat
* Currency volatility indexes higher
* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Recasts; adds investor quotes; updates prices; changes dateline; previous LONDON)
By Kate Duguid
NEW YORK, May 7 (Reuters) - The U.S. dollar rose and the Chinese offshore yuan stayed hobbled near 2-1/2 month lows on Tuesday after U.S. President Donald Trump's threat of additional tariffs on Chinese goods rattled traders, though both moves were modest.
Unlike on Monday, foreign exchange traders expressed no fresh panic on Tuesday at the prospect of a breakdown in negotiations between China and the United States to resolve the trade conflict.
Demand for currency-related volatility products jumped on Monday, sending the Chicago Board Options Exchange volatility indexes higher. Prices on Tuesday remained elevated. The Euro index was slightly off the prior day's highs, down half a percent, but remained up 5.4% from Friday. The Japanese Yen Volatility Index was last up 5.4% and the British Pound Volatility Index was last up 1.8%.
"Given investors have been selling volatility since January, they have probably sold more than they wanted and are now scrambling in the opposite direction," said Thierry Wizman, global interest rates and currencies strategist at Macquarie Group.
Traders are "trying to cover their short volatility plays, trying to protect themselves with some optionality, sending foreign exchange vols higher and obviously sending the dollar higher against some of the key pairs," he added.
Trump tweeted on Sunday that he would raise tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent by the end of the week and would "soon" target the remaining Chinese imports with tariffs.
But top Chinese negotiator Vice Premier Liu will head to Washington this week for talks, and some investors have interpreted Trump's threat as a negotiating tactic.
"As long as the talks continue, the market will remain relaxed... that there will be a deal after all," said Esther Reichelt, currency analyst at Commerzbank.
The offshore yuan on Monday had been on course for its worst daily drop in 10 months, briefly touching a four-month low of 6.8218, but it later recovered some of those losses while remaining under pressure. It was last down 0.38% at 6.797 yuan per dollar.
The dollar index was 0.14% higher, last at 97.652, with the dollar 0.13% stronger against the euro at $1.118 .
The Australian dollar surged as much as 0.8 percent to $0.7048 after the country's central bank held interest rates at a record low, dashing speculation it might ease policy following a weaker-than-expected reading of inflation. It was last 0.23% higher.
Reporting by Kate Duguid and Tommy Wilkes; Editing by Dan Grebler