Dollar set for second weekly advance as Fed comes into 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 with small gains after a turbulent several days when currencies were tossed by shifting risk appetite, with the market's focus now on next week's U.S. Federal Reserve meeting.

The dollar index was up 0.2% for the week, rising slightly on Friday to stand at 92.902.

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.

The safe-harbour yen weakened about 0.2% for the week and last traded at 110.30.

Meanwhile, the euro was 0.3% lower over the period at $1.1766, with most of that coming overnight after the European Central Bank pledged to keep interest rates at record lows for even longer, as widely expected.

ECB President Christine Lagarde, in her media briefing, said a fresh wave of the coronavirus 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 U.S. is better positioned than others to withstand the spread of the Delta variant thanks to its earlier strong vaccination drive," Westpac strategists wrote in a client note.

The uptrend in the dollar index is "showing tentative signs" of stalling around 93.0, they said, "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."

The British pound recovered from losses as steep as 1.3% for the week to trade just about flat at $1.3755, 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 nearly 0.3% to $0.73665 on Friday and was headed for a 0.5% 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.