* Dollar up for 2nd day, claws back more of its recent losses
* European shares down on banks as UBS results underwhelms
* Corporate M&A continues as Tesco snaps up Booker Group
* Bunds set for worst week since U.S. election as Trump takes charge
* Investor flows continue to back reflation trades: BofA-ML
By Vikram Subhedar
LONDON, Jan 27 (Reuters) - The dollar regained more ground against a basket of currencies on Friday, while banks weighed on European shares following underwhelming results from Swiss major UBS.
The two-day recovery in the dollar follows its 4 percent drop in the three weeks from Jan. 3 on doubts about how U.S. President Donald Trump's policies will affect the currency, particularly after he hinted at concerns over its strength.
The dollar index measuring its strength against a basket of six other major currencies rose 0.2 percent to 100.54.
Trump suggested overnight he would push ahead with a 20 percent border tax on Mexico, dragging down the peso and refocusing market expectations on his pro-business policies which, along with healthy corporate results, helped stocks on Wall Street scale new highs.
Some U.S. protectionism is seen as dollar-positive as it may bring capital back to the United States.
Futures on the S&P 500 were pointing to a flat open following the previous session's rally that catapulted the Dow Jones Industrial Average above 20,000 for the first time.
"The (dollar) has experienced a powerful rebound re-establishing post-U.S. election relationships between the performance of risk assets and U.S. bond yields on the one hand and the (dollar) on the other hand," Morgan Stanley FX strategists led by Hans Redekker said in a note to clients.
Benchmark German bonds are headed for their weakest week since the aftermath of November's U.S. election on Friday, as Trump's first seven days in office fuel expectations of inflation and growth-boosting policies in the world's biggest economy.
One market gauge of long-term inflation expectations in the euro zone -- the five-year, five-year forward rate -- climbed to its highest in over a year on Friday and is broadly in line with the ECB's target of near 2 percent.
"Following the whirlwind first week of the Trump presidency, the pace of the impact on inflation is once again being revised," said Ryan McGrath, a bond strategist at Cantor Fitzgerald.
Investor flows continue to point to a preference for so-called "reflation" trades, according to the latest weekly data from Bank of America-Merrill Lynch and fund tracker EPFR.
Funds investing in TIPS, which offer protection against rising inflation, high-yield bonds and Japanese equities, attracted inflows over the past week, the data showed.
"But the re-positioning feels grudging and flows have yet to show big asset-allocation capitulation out of bonds into stocks," Bank of America-Merrill Lynch strategists said.
European stocks were headed for a weekly gain of about 1 percent, though they were slightly lower on Friday as weakness in the banking shares weighed.
A fall in profits sent UBS shares down more than 3 percent as investors locked in some gains following a strong rally in financials stocks following the U.S. election. The European banking index fell 1.2 percent.
In the UK, the FTSE was also slightly lower but outperformed other regional benchmarks supported by merger activity as leading supermarket operator Tesco snapped a smaller wholesaler. Tesco shares surged 10 percent.
In commodity markets, oil prices gave up earlier gains as rising crude output from the United States was seen offsetting efforts by OPEC and other producers to prop up the market by cutting supplies.
Trading was choppy however as volumes were lighter than average with much of Asia closed due to the start of the Lunar New Year holiday.
Brent crude futures, the international benchmark for oil prices, were trading at $55.98 per barrel, down 0.5 percent from their last close.
U.S. West Texas Intermediate (WTI) crude futures were down 0.2 percent at $53.67 a barrel.
(Additional reporting by John Geddie; Editing by Jeremy Gaunt and Hugh Lawson)