September 21, 2018 / 7:51 AM / 8 months ago

FOREX-Dollar set for biggest weekly drop in 7 months

* Rising U.S. yields, stronger stocks fuel demand for risk

* British pound is the only loser against struggling dollar

* Graphic: World FX rates in 2018

By Saikat Chatterjee

LONDON, Sept 21 (Reuters) - The dollar weakened against most of its rivals on Friday, barring the British currency, as stronger equity markets and rising bond yields fuelled a rush to buy riskier assets.

With trade war concerns receding in the background and emerging market central banks led by Turkey taking measures to stabilize their currencies, investors pushed the euro to the $1.18 line for the first time in more than three months.

“This is textbook risk-on behaviour in the markets and though it is hard to find an immediate catalyst, falling trade conflict concerns and improvement in emerging market sentiment has helped,” said John Marley, a senior currency consultant at FX risk management specialist, Smart Currency Business.

Premier Li Keqiang pledged on Wednesday that Beijing will not engage in competitive currency devaluation, a day after his country and Washington plunged deeper into a trade war with more tit-for-tat tariffs.

Wall Street indexes hit a record high again in the previous session, encouraging Asian indexes to finish the week on a strong note while Asian currencies led by the Hong Kong dollar gained.

In early trading, the dollar dipped 0.1 percent to 93.82, its lowest in nearly three months and set for its biggest weekly drop since early February.

A selloff in the dollar that began in the late European session on Thursday gathered steam overnight as investors ramped up bets that the U.S. Federal Reserve is nearing the end of its multi-year rate hike cycle after raising rates next week.

Market expectations are for fewer than two rate hikes next year and Russell Investments said medium-term recession risks in the U.S. economy are now elevated, pointing to a number of indicators such as a tightening labour market.

“The weakness in the dollar is prompting investors to unwind their short bets against other currencies such as the euro and this move may have further room to run,” said Manuel Oliveri, a currency strategist at Credit Agricole in London.

The single currency climbed 0.2 percent higher to $1.18, taking its gains for the week to nearly 1.5 percent.

Amid a bounce in currencies such as the Turkish lira and South African rand, ravaged earlier in the month by trade friction and domestic factors, MSCI’s emerging market currency index climbed 0.4 percent to its highest since late August.

The Australian dollar, a proxy of China-related trades as well as gauge of risk sentiment, climbed to a three-week high of $0.7297.

The pound was the only notable loser against the dollar, weakening 0.4 percent to $1.3217 on Brexit concerns. (Reporting by Saikat Chatterjee; Additional reporting by Shinichi Saoshiro in TOKYO Editing by Peter Graff)

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