* 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 tmsnrt.rs/2egbfVh
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.
The greenback index is set for its biggest weekly fall since May 2016, down more than 2% since Monday.
“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 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, its strongest since July.
The single currency was stuck below $1.08 last month.
The dollar index skidded 0.7% to 95.892, its weakest since July.
Against the yen, the dollar dropped more than 1% and below 105 yen. 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 and Australian and New Zealand dollars and versus Asian currencies, where the coronavirus economic effect is pronounced.
Sterling seized on the dollar’s spiral downwards, hitting $1.3015 before settling at $1.2987.
Editing by Larry King, Robert Birsel
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