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FOREX-Dollar set for second week of gains as focus turns to Fed

·4 min read

* Greenback gives back most of week's gains as COVID-19 fears ease

* Euro softer after ECB pledged record low rates for longer

* Aussie on course for fourth weekly slide as lockdowns weigh

* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E

By Ritvik Carvalho

LONDON, July 23 (Reuters) - The U.S. dollar was set for a second week of gains after a turbulent few days when currencies were buffeted by shifting risk appetite, with the market's focus now on next week's Federal Reserve meeting.

The dollar index, which measures the greenback against a basket of peer currencies was up 0.2% for the week, rising slightly on Friday to stand at 92.926.

But that was off a 3-1/2-month high of 93.194 hit on Wednesday, after strong Wall Street earnings helped investors regain some of the confidence lost to earlier worries the Delta variant of the coronavirus could derail the global economic recovery.

"Markets have re-focused on the pandemic, as the Delta variant is leading to renewed measures to fight the virus," analysts at BofA Global Research said in a note to clients.

"Moreover, the Delta variant is also highlighting the recent slowdown in U.S. vaccination rates, which could hamper the expected re-opening of the economy. Meanwhile, inflation also continues to surprise to the upside."

The analysts said they continue to expect most dollar upside at the end of the year, led by an end-2021 euro/dollar forecast of $1.15.

The safe-harbour yen weakened about 0.2% for the week and last traded at 110.46 yen per dollar, down 0.3% on the day.

Meanwhile, the euro traded flat over the period at $1.1772, unmoved by purchasing manager surveys coming out of France, Germany and the euro zone as a whole.

Euro zone business activity expanded at its fastest monthly pace in over two decades in July as the loosening of more COVID-19 restrictions gave a boost to services, but fears of another wave of infections hit business confidence.

IHS Markit's Flash Composite Purchasing Managers' Index, seen as a good guide to economic health, climbed to 60.6 in July from 59.5, its highest reading since July 2000.

The figures came in the wake of the European Central Bank's meeting on Thursday, in which it pledged to keep interest rates at record lows for even longer. ECB President Christine Lagarde said a fresh wave of the pandemic could pose a risk to the region's recovery, although she did offer a more balanced economic outlook.

While most analysts see the ECB's dovish pivot as weighing on the single currency, those at TD Securities say it could push up to $1.1851 in the near-term.

"The lack of hints on future policy moves is a moderate disappointment to those looking for a stronger dovish signal," they wrote in a research note.

The market's next major focus is the Federal Reserve's two-day policy meeting that wraps up on Thursday. Since the previous meeting on June 16, when Fed officials dropped a reference to the coronavirus as a weight on the economy, cases are spiking.

Many economists, however, still expect the meeting to produce some advancement in the discussions for a tapering of stimulus.

The British pound recovered from losses as steep as 1.3% for the week to trade just about flat at $1.3741, buoyed by the recovery in risk sentiment even with COVID-19 cases broadly on the rise.

However, Australia's dollar - often viewed as a proxy for risk appetite - slid 0.3% to $0.7360 on Friday and was headed for a 0.5% drop on the week, which would be a fourth straight weekly loss.

With half the Australian population languishing under lockdown, economists speculate the country's central bank could increase stimulus rather than decreasing it at its next policy meeting.

"The balance of risks point to more weakness in AUD in the near term," Commonwealth Bank of Australia strategist Joseph Capurso wrote in a client note.

(Reporting by Ritvik Carvalho; additional reporting by Kevin Buckland in Tokyo; editing by Philippa Fletcher and Pravin Char)