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Sterling gains from broad-based plunging US dollar

By Olga Cotaga and Iain Withers

* Graphic: World FX rates in 2020

* Graphic: Trade-weighted sterling since Brexit vote (Updates throughout)

By Olga Cotaga and Iain Withers

LONDON, March 6 (Reuters) - Sterling extended gains against a broadly weaker dollar on Friday, and was also boosted by comments from the European Union's chief Brexit negotiator that a trade deal between Britain and the bloc was still possible this year.

Against the dollar, sterling was on course for its best week since mid-October.

The pound remained underpinned by the Bank of England's decision not to cut rates for now in response to the coronavirus epidemic.

The dollar has faltered on a slide in U.S. government bond yields as investors slashed expectations for a further Federal Reserve rate cut after this week's emergency move.

British government bond yields also plunged, hitting all-time lows on Friday as they approached zero with investors stampeding into safe-haven assets.

Money markets are pricing in at least a 25 basis point cut in rates by the BoE when it next meets on March 26 and nearly 50 basis points of cuts by the end of the year.

Sterling rose to a two-and-a-half week high of $1.3050 and was last trading up 0.63% at $1.3038.

Britain and the EU this week concluded their first round of trade talks since Britain left the bloc and are due to reconvene on March 18.

EU negotiator Michel Barnier said the two had "very serious" differences about their future relationship, but a deal remained possible.

Against the euro sterling was last broadly flat at 86.75 pence.

The main driver for the pound is going to be the coronavirus, so "it is certainly possible that Brexit risk remains in the background as a pound driver for longer now", said Lee Hardman, currency analyst at MUFG.

On top of that, "there has already been speculation that coronavirus-related disruption could prompt policymakers to alter the timeline for negotiations", Hardman said.

"Market participants will for now focus on the June deadline set recently by the UK government by which they expect to have a 'broad outline' of a trade deal with the aim to finalise by September," he added.

Market gauges for implied volatility in sterling were much lower than towards the end of last year, when heightened worried of a no-deal Brexit weighed on traders' minds. (Reporting by Olga Cotaga and Iain Withers; Editing by John Stonestreet and Alex Richardson)