FOREX-Euro yuan slide as trade war worries drive investors into dollars

* U.S. escalates trade conflict with new tariff plan
* Euro weakens to two-week low as dollar gains
* Yuan hits more than 14-month low, Aussie pressured
* Sterling slides ahead of expected BoE rate hike
* Graphic: World FX rates in 2018

By Tommy Wilkes

LONDON, Aug 2 (Reuters) - The euro fell almost half a percent and the Chinese yuan dropped to a 14-month low on Thursday after a flare-up in the trade tensions between the United States and China sent investors scrambling to buy the U.S. currency.

U.S. administration officials said on Wednesday that President Donald Trump was proposing a 25 percent tariff on $200 billion worth of Chinese imports, rattling global financial markets and sending equity markets tumbling. China urged the United States to return to reason.

The euro fell 0.4 percent to a two-week low of $1.1608.

China's offshore yuan, which has been under pressure on worries the months-long trade dispute will hurt its economy, slid another half percent to as low as 6.868 yuan, its weakest since May 2017.

"Ultimately, where do you go? You go to the currency that is the most stable and actually has a yield," said Michael Hewson, chief analyst at CMC Markets, explaining why investors had rushed to buy dollars.

The dollar index, which measures it against a basket of six currencies, rose 0.3 percent to 94.944, off last week's 3 1/2-week low of 94.084.

The Australian dollar, seen as a proxy for Chinese growth because of Australia's export-reliant economy, also sold off, slipping 0.6 percent to $0.7363.

The safe-haven Swiss franc hit a one-month high against the euro but was weaker against the dollar.

FED BOOST The safety bid for the U.S. currency was further bolstered by higher U.S. Treasury yields and an upbeat assessment from the Federal Reserve.

After ending its two-day policy meeting, the Fed left interest rates unchanged, as expected, and said U.S. economic growth has been rising and the job market had continued to strengthen.

Analysts said the meeting was mostly uneventful although the central bank was more positive on the economy.

"Indeed, the only change even worth highlighting from the statement was a slightly more upbeat view of growth in economic activity, which the Fed now regards as "strong" as opposed to "solid" previously," Deutsche Bank analysts said.

The yen bucked the trend of weakness, rising 0.2 percent against the yen to 111.48 as benchmark Japanese government bond yields touched a 1 1/2-year high.

The yen's gains were limited after it dropped on Tuesday, following the Bank of Japan's pledge to keep rates low for an extended period.

The British pound fell 0.4 percent to $1.3078 before the Bank of England's policy meeting later on Thursday. Markets widely expect it to raise rates for the second time since the global financial crisis.

The Mexican peso initially found support from growing optimism about the renegotiation of the North American Free Trade Agreement, but later fell 0.7 percent to 18.716 as the dollar gained across the board.

(Editing by Larry King)

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