May 12, 2017 / 12:04 PM / 7 months ago

FOREX-Dollar heads for strongest week this year on Fed hike bets

* Dollar boosted by view Fed will raise rates in June

* Monetary policy divergence overtakes politics as key driver

* Focus on U.S. data, strength of economic growth momentum

* Graphic: World FX rates in 2017

By Jemima Kelly

LONDON, May 12 (Reuters) - The dollar traded near a three-week high on Friday, on track for its strongest week this year, after strong data bolstered expectations that the Federal Reserve will raise interest rates again in June.

A rally to 14-year highs for the dollar, inspired by the election of U.S. President Donald Trump, has fizzled out since the start of this year. The currency has fallen as much as 5 percent as the pro-growth measures Trump had promised have been called into question.

But despite a wobble earlier in the week after Trump’s abrupt firing of FBI Director James Comey - which was suspected to have been driven by political motives - the dollar was up around 1 percent for the week against its broad index, after reaching a three-week high on Thursday.

That, said analysts, was partly the result of a broad market focus shift away from politics and back towards monetary policy. With investors now pricing in an 80 percent chance of a Fed rate hike next month, while other central banks continue to ease policy, that could drive the dollar higher.

Traders will be closely watching U.S. retail sales and consumer price inflation data for April, due at 1230 GMT.

“It looks like the June hike is largely priced now, so I think it would take a really terrible number to knock confidence in that at the moment,” said ING’s head of currency strategy in London, Chris Turner.

Data released on Thursday showed new applications for U.S. jobless benefits unexpectedly fell last week while producer prices rebounded in April, pointing to a tightening labour market and rising inflation.

The euro, which hit a six-month high above $1.10 at the start of the week on relief that centrist Emmanuel Macron had beaten far-right candidate Marine Le Pen to become French president, was trading flat at $1.0865, down 1.2 percent since Monday - its worst week in six.

“Currency investors have flipped to a net short position in the dollar ... We think that position is vulnerable to an unwind, as market focus shifts from politically driven risk-on or risk-off (sentiment) to monetary policy divergence,” said BNP Paribas currency strategist Sam Lynton-Brown, in London.

The dollar was flat at 113.88 yen, down from its eight-week high of 114.38 yen reached earlier in the week.

The U.S. currency has gained more than 4 percent in the three weeks since the first round of the France’s presidential elections, with the yen slipping as risk aversion receded.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url= (Additional reporting by Masayuki Kitano in Singapore, Editing by Catherine Evans)

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