By David Milliken
LONDON, Jan 20 (Reuters) - The Bank of England must be "very alert" to geopolitical risks, Governor Andrew Bailey said on Tuesday as financial markets were thrown into fresh turmoil by U.S. President Donald Trump's stated desire to control Greenland and the risk of a trade war.
Wall Street futures hit one-month lows, while the dollar entered a second day of declines and long-dated government bond yields rose sharply.
Bailey, responding to lawmakers' questions, said geopolitical risks
had risen over the past year, contributing to U.S. dollar weakness and record high gold prices, but the impact on markets and economic growth had been less than feared so far.
"We worry considerably about how markets can react to those things. Market reactions have actually been more muted than we would have feared and expected," Bailey told the British parliament's Treasury Committee.
Investors were having to balance "extreme" statements against their experience that such threats were generally not carried out, he said.
Some investors have taken an approach of discounting Trump's public statements, known as "TACO", short for "Trump always chickens out".
"I'm not saying I'm a believer in this sort of 'TACO trade' notion. But did the tariffs follow through to some of the more extreme things that were being said?" Bailey said.
"After Liberation Day (tariff announcements) ... the U.S. authorities reconsidered. As a result, the market volatility that we saw ... calmed down."
Asked how concerned the BoE was about Trump's pursuit of Greenland and trade tensions, Bailey said he did not want to say that specific issues could be a trigger for upheaval in the financial system.
"But the level of geopolitical uncertainty and the level of geopolitical issues is obviously a big consideration," Bailey said. "We have to remain very alert to these things," he said.
BoE Deputy Governor Dave Ramsden said that so far this year, yields on U.S., British and euro zone government bonds had been fairly stable, with Japanese government debt being the exception, due to domestic political factors.
He rejected the suggestion from one lawmaker that any loss of confidence in U.S. government debt could boost demand for British government bonds.
"Given our relative reserve currency statuses ... it would have negative consequences," he said. "Increasingly we are seeing that U.S. yields might rise and we see the consequence in our yields rising."
British government bond yields rose sharply on Tuesday, mirroring a rise in U.S. borrowing costs. Thirty-year gilt yields were on course for their biggest daily jump since November 14.
(Reporting by David Milliken, Writing by Suban Abdulla; Editing by William Schomberg and Alison Williams)
