UPDATE 2-Euro zone bond yields fall on China tariffs and Fed cut expectations

By Dhara Ranasinghe and Virginia Furness

* German bond yields dip two bps after China tariffs/Powell

* U.S. Treasury, UK gilt yields also rise

* Fed's Powell says U.S. economy is in "favourable place"

* Investors still expect rate cut

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr (Recasts to lead with Powell comments)

By Dhara Ranasinghe and Virginia Furness

LONDON, Aug 23 (Reuters) - Euro zone bond yields dipped on Friday after China introduced retaliatory tariffs on $75 billion of U.S. goods, while Federal Reserve chair Jerome Powell gave few clues about whether the central bank will cut interest rates at its next meeting or not.

Bond yields across the bloc had risen in early trade as investors scaled back expectations for aggressive U.S. rate cuts, but reports that China has struck back at U.S. tariffs prompted more buying of government bonds.

The U.S. economy is in a "favorable place" and the Federal Reserve will "act as appropriate" to keep the current economic expansion on track, Fed chair Jerome Powell said on Friday.

Analysts noted that the phrase "mid-cycle adjustment" was conspicuous by its absence, particularly after the relative hawkishness of the Fed's minutes on Wednesday.

"It does seem like this is a Fed that is inching towards additional rate cuts, and this is entirely appropriate," said Peter Chatwell, rates strategist at Mizuho. "Unless the Fed cuts to below 1.4%, there will be a recession."

German government bond yields were last 3.4 bps lower at -0.67%, having been as high as -0.603 earlier in the session.

"A lot was already priced in with the Chinese announcement," said Chatwell. "The thinking is implicitly that this will need a dovish reaction from the Fed. Powell didn't over-egg the current strength of the real economy."

Two Federal Reserve officials said on Thursday they saw no reason to cut rates without new economic deterioration, a day after Fed meeting minutes showed policymakers disagreed on the rate cut last month.

Along with slightly improved data in the euro area and over-stretched positions in global bond markets, that encouraged some selling before Powell speaks, analysts said.

"There's been no jaw-dropping news this week, but we have had incrementally less bond-friendly news - the FOMC minutes, the euro area PMIs, and Fed speakers in recent days that give the impression that July was an insurance rate cut," said John Davies, G10 rates strategist at Standard Chartered Bank.

"This has dragged the market away from speculating about a 25- to 50-basis-point rate cut in September to a discussion on a 25 bps cut to `will they cut rates', so a bit more uncertainty has been injected into markets."

Italian yields also edged lower on hopes that snap elections in the euro zone's third-biggest economy can be avoided.

President Sergio Mattarella on Thursday gave Italy's bickering parties five days to clinch a deal to resolve a political crisis and avoid an election.

The anti-establishment 5-Star Movement sought to gain the initiative as it began formal talks on Friday with the opposition Democratic Party (PD) to try to form a coalition to end Italy's government crisis.

"Since the resignation of (Giuseppe) Conte as prime minister on Tuesday, the outperformance of BTPs has gathered momentum, which suggests there is hope a government will be formed and a budget will be in place," said Pooja Kumra, European rates strategist at TD Securities.

The 10-year Italian bond yield dipped to around 1.30% , close to its lowest in almost three years. The gap over German bond yields was at 195 bps, having narrowed to 190 bps earlier in the session, its tightest in four weeks .


(Reporting by Dhara Ranasinghe and Virginia Furness; Editing by Toby Chopra)