FOREX-Trump tariff threats sends yuan reeling; yen up

The Japanese yen gained on Monday while the Chinese yuan was set for its biggest drop in 10 months after U.S. President Donald Trump again threatened to raise tariffs, triggering a selloff across risky assets. Trump said on Sunday he would raise U.S. tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon, an abrupt shift. On Friday, Trump had cited progress in trade talks and praised his relationship with Chinese President Xi Jinping.

"This has the potential to upset the global risk applecart, especially after the recent calm," said Ulrich Leuchtmann, head of FX & EM research at Commerzbank in Frankfurt. The yuan fell almost 1 percent to near its lowest levels this year, around 6.80 per dollar. Both the Mexican peso and the Turkish lira fell by more than half a percent each.

Other currencies whose fortunes are linked to the Chinese economy such as the Australian dollar and the New Zealand dollar, declined 0.3 to 0.5 percent. The selloff wasn't limited to currencies -- a gauge of European equities fell nearly 2 percent in early trading.

Moves were exaggerated with London and Japanese markets closed for holidays. RATE CUTS

Major currencies held near the day's lows, with the dollar stable against a basket of its rivals Investors weighed the prospects of an inflationary boost to the U.S. economy if Trump pressed ahead with higher tariffs on imported goods amid growing expectations of a U.S. interest rate cut later in the year.

Money markets showed more probability of a U.S. interest rate cut by January, with bond futures pricing in up to 30 basis points in cuts by January. Rising expectations of a rate cut would undermine some of the large dollar positions built up by speculators. The latest positioning data showed net dollar long bets were the highest since December 2015.

Sterling declined half a percent and reversed some of Friday's gains, after opposition Labour Party accused Prime Minister Theresa May of leaking details of the compromise under discussion and jeopardising talks. May on Sunday stepped up calls for Labour Party leader Jeremy Corbyn to agree a cross-party deal to leave the European Union, following poor results for both parties in local elections last week.

(Reporting by Saikat Chatterjee; editing by Larry King)