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* Gains for euro, sterling prod dollar index lower
* Euro on course for best week this year
* But weekly rise in 1-week volatility most since launch of euro
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, April 20 (Reuters) - The dollar inched lower against a basket of major currencies on Thursday, suffering from a solid performance by the euro before the first round of French presidential elections and from an improvement in sentiment towards Britain's pound this week.
The biggest mover overnight was the New Zealand dollar, jetting higher after inflation surged past 2 percent to its highest in five years, bolstering the case for a rise in kiwi interest rates over the next year.
Attention is largely focused on the French vote, however. Despite a surge in measures of expected volatility, the euro rose another third of a percent to $1.0748 in early European trade, its strongest in three weeks.
Even with polls giving both far-right and far-left candidates a chance of making it into next month's run-off, the single currency has gained 1.3 percent this week, its strongest performance in 2017 so far.
Traders put that down more to a broadly weaker tone to the dollar, which sold off across the board on Tuesday as faith in continuing U.S. economic outperformance and the Trump administration's promises of tax reform wavered.
"I'm more inclined to think that we are dealing with that kind of dynamic," said Barclays strategist Hamish Pepper.
"We still expect the dollar to strengthen a bit more into the end of year, but I do see more and more signs that perhaps the dollar has peaked. The data has started to look slightly more inconsistent than it was, and there is the doubt over what we will get on the fiscal front."
By 0848 GMT, the dollar had fallen 0.14 percent to 99.601. It was marginally higher at 108.96 yen but around 0.4 percent weaker against sterling at $1.2824.
The bounce for the New Zealand dollar comes at a time of flux for monetary policy in a number of developed economies.
Money market expectations for a rise in European Central Bank interest rates have largely evaporated.
Yet a Reuters poll on Thursday showed the bank's next move would be to cut the value of its monthly bond purchases, and speculation is rife that the bank will be able to change tack once political risks to the euro abate.
"Relative to its U.S. counterparts, Europe offers good value on strong economy, even peripherals like Portugal are posting bullish economic data," said Shaniel Ramjee, a multi-asset fund manager with Swiss investment firm Pictet.
"We would have been even more positive were it not for the uncertainties triggered by the French presidential election."
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 (Editing by Mark Trevelyan)