Dollar eases amid recovery in risk appetite with Fed meeting in focus

© Reuters. FILE PHOTO: A U.S. dollar banknote is seen in this illustration taken May 26, 2020. REUTERS/Dado Ruvic/Illustration

By Kevin Buckland

TOKYO (Reuters) - The dollar was set to end the week close to where it started following a roller-coaster week in which currencies were tossed around by shifting risk appetite, with the market's focus now shifting to next week's U.S. Federal Reserve meeting.

The dollar index is on track to advance 0.1% for the week, having barely budged overnight to stand at 92.782 in Asia on Friday.

That was, however, off the 3-1/2-month high of 93.194 hit on Wednesday as 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 recovery.

The safe-harbour yen weakened less than 0.1% during the week to trade at 110.135.

Meanwhile, the euro was 0.2% lower over the period at $1.1779 after the European Central Bank pledged to keep interest rates at record lows for even longer, as widely expected.

The uptrend in the dollar index is "showing tentative signs" of stalling around 93.0, "but its overall resilience regardless of the shifting risk mood and the ECB's shift to a more structurally dovish policy stance suggest retracements will likely be limited to the 91.5-92.0 zone," Westpac strategists wrote in a client note.

"The U.S. is better positioned than others to withstand the spread of the delta variant thanks to its earlier strong vaccination drive."

The British pound recovered from losses as steep as 1.3% for the week to trade about 0.1% higher at $1.37755, 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 - was still headed for a 0.2% drop, which would be a fourth straight weekly decline.

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 (OTC:CMWAY) strategist Joseph Capurso wrote in a client note.