July 14, 2017 / 11:59 AM / 9 days ago

REFILE-FOREX-Aussie scales 8-month highs as risk appetite blooms

4 Min Read

(Corrects spelling of Dallas Fed's Kaplan in ninth paragraph)

* U.S. inflation data seen key event risk in session

* Money mkts: Less than 50 pct Fed hike chance over next yr

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, July 14 (Reuters) - The Australian dollar hit a fresh eight-month high on Friday as risk appetite was robust with global stock markets hitting record highs and after dovish comments from global policymakers.

The Australian dollar rose 0.4 percent to $0.7758, well on track to post its best weekly performance in four months. It gained by a similar quantum against the Japanese yen.

The U.S. dollar remained broadly on the back foot as traders preferred to play the risk-on trade against the yen, especially before key U.S. inflation data later today that may skew interest rate expectations in the markets.

"Current market pricing suggests that the impact of these inflation related releases could be asymmetric, with higher inflation expectations leading towards a repricing of the U.S. curve translating into dollar strength," Morgan Stanley strategists wrote in a note.

Money markets pricing suggests less than a 50 percent chance of a hike over the next year, according to CME's FedWatch tool.

For the week, the Australian dollar and the Canadian dollar are among the top gainers after European shares were poised to post their best week since late April.

Major market gauges of asset volatility, such as the Merrill Lynch Option volatility estimate and VIX, drifted lower on Friday, providing a boost to carry trades.

The U.S. currency's recent advance, notably against the yen , has stalled towards the end of this week after Federal Reserve Chair Janet Yellen curbed some of the monetary tightening expectations that had supported the greenback.

That view was further reinforced by other U.S. policymakers such as Dallas Federal Reserve Bank President Robert Kaplan on Thursday, though analysts were wary of kicking the dollar lower before U.S. inflation data.

Signs of a pick-up in U.S. inflation could reinforce views that the Fed would hike interest rates again sooner rather than later, which would lift Treasury yields and the dollar.

However, the core consumer price index (CPI) is forecast to have risen only 1.7 percent year-on-year in June after a similar gain in May. On a month-on-month basis, the core CPI is expected to rise 0.2 percent after a 0.1 percent gain the previous month.

"It is broadly a U.S. dollar-negative market as latest comments from Yellen and others suggest that interest rates will rise very gently and that is supportive for high-yielding currencies for now," said Viraj Patel, an FX strategist at ING Bank in London.

The euro was a shade higher at $1.1418, unable to find much of a lift even as Germany's 10-year bond yield climbed back above the 0.50 percent threshold overnight. That followed a report that the European Central Bank is likely to signal in September that its asset purchase programme will be gradually wound down next year.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets

Additional reporting by Shinichi Saoshiro in TOKYO; Editing by Toby Chopra

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