By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The safe-haven yen surged across the board on Wednesday, while sterling plummeted to a 31-year low on mounting worries about the broader impact Britain's vote to leave the European Union would have on the global economy.
The yen soared to a 3-1/2 year high against the British pound, and climbed to two-week peaks versus the dollar and euro.
Sterling underperformed once again, falling below $1.28 against the dollar for the first time since 1985, as fears of foreign outflows and Bank of England rate cuts hit the currency hard. It recovered from those lows, but was still down 1.0 percent at $1.2901.
Fears of contagion intensified after three UK property funds stopped redemptions, which sent investors scurrying into the safety of government bonds. The benchmark 10-year Treasury yield sank to a record low of 1.3210 percent <US10YT=RR> on Wednesday while German Bund 10-year yields went deeper into negative territory.
"The news (on the UK property funds) continued to spook already nervous investors about the impact of the Brexit on the U.K. and global financial system, which by all accounts, has yet to be fully felt," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
In mid-morning trading, sterling dropped to its lowest since late 2012 versus the yen, and was last down 2.3 percent at 130.16 yen <GBPJPY=>.
The dollar fell 0.8 percent to 100.91 yen <JPY=>, after earlier falling to a two-week low of 100.22 yen. The euro, meanwhile, dropped nearly 1 percent to 111.56 yen <EURJPY=>.
The dollar retraced its losses against the yen after data showed the pace of growth in the U.S. economy's service sector increased in June by the fastest in seven months. The Institute for Supply Management (ISM) said its index of non-manufacturing activity rose to 56.5 from 52.9 the month before. The reading was above expectations of 53.3 from a Reuters poll and was the highest reading since November.
The dollar also rose versus the euro, which fell 0.2 percent to $1.1053 <EUR=> following the ISM report.
Expectations that the Federal Reserve will keep U.S. rates lower for longer have weighed on the dollar since Brexit. Influential Fed policymaker William Dudley suggested on Tuesday that broad contagion through financial markets was a risk, particularly if the vote leads to EU instability.
Fed Governor Daniel Tarullo also weighed in on the U.S. rate outlook, saying on Wednesday it is better to wait for more evidence of inflation moving to the Fed's target level before taking further monetary policy action.
Yen timeline http://tmsnrt.rs/1Xoyiva
Brexit currency reactions (Pound and Yen) http://tmsnrt.rs/29gU3MP
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Anirban Nag in London; Editing by Chizu Nomiyama)