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CORRECTED-FOREX-Dollar back in demand, set for biggest weekly surge since early April

(Corrects para 4 to reflect dollar index Sept gain, not decline)

* Dollar index down less than 0.1% on day

* Aussie and Kiwi rise 0.5-0.6%

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E

LONDON, Sept 25 (Reuters) - The dollar extended its gains on Friday and was on track for its best week since early April, while riskier currencies sold off, as rising coronavirus infections in Europe and uncertainty surrounding the upcoming U.S. elections turned markets cautious.

Coronavirus cases have surged in Europe this week, prompting lockdown measures in Britain. European Union health officials warned of a “twindemic” of both COVID-19 and flu, urging governments not to let their guard down.

Currency moves were closely correlated with share indexes, which have fallen sharply this week as markets re-evaluated the shape of a possible recovery from the pandemic.

At 1132 GMT, the dollar index was at 94.563, up 0.3% on the day. It is on track for its best week in nearly six months and is up more than 2% so far in September.

“The dollar is doing well under risk-aversion conditions and lower asset prices – not to the same extent that we saw in March/April but certainly enough to take notice,” said Neil Jones, senior director and head of FX sales at Mizuho.

“That correlation continues to re-emerge, it’s proving quite reliable,” he said.

Jones said the mechanics behind the dollar strength could be due to a combination of short covering, as traders quite short-dollar, long-euro positions, and investors selling assets and putting the proceeds into a U.S. dollar account.

The euro was down 0.3% at $1.16365 at 1136 GMT, close to two-month lows hit on Thursday.

Riskier currencies fell, with Australian dollar set to end the week down 3.5%, its worst week since March, and the New Zealand dollar down 3% on the week.

The Norwegian crown reached new three-month lows against the dollar, down 0.9% on the day at 9.5785 at 1140 GMT, also down around 0.5% against the euro.

The trend reversed briefly in overnight and early London trading on Friday: the dollar dipped and the Aussie and Kiwi dollars recovered some losses, boosted by a late tech-driven rally in Wall Street and hopes that Washington was closer to agreeing on a fiscal stimulus package for the United States.

But, after opening higher, European shares soon turned red, and the dollar resumed its gains.

“The re-pricing of global recovery expectations may remain a key narrative in markets for longer as more evidence of rising contagion waves (in particular in Europe) is set to fuel concerns about new lockdown measures and their economic impact,” ING strategists wrote in a note to clients.

Although investors remain cautious over the upcoming U.S. elections, the dollar demand is not expected to reach the same extent as that in March.

“The ongoing political battle over the nomination of a new Supreme Court justice has increased investors’ sensitivity to U.S. politics and decreased their willingness to expose themselves to dollar moves ahead of the November elections,” UBS strategists Gaétan Peroux and Tilmann Kolb said in a note.

“While we expect further USD strength in the short term as the speculative positioning washout continues, we continue to hold a long-term bearish view on the dollar at current overvalued levels,” they added.

The yen was a touch lower against the dollar to 105.475 , while the Swiss franc gained around 0.1% against the euro, at 1.08.

Reporting by Elizabeth Howcroft Editing by Tomasz Janowski and Louise Heavens

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