Dollar heads for best run in 17 years

By Patrick Graham

LONDON (Reuters) - The U.S. dollar headed for its ninth straight week of gains on Friday, some measure of how the economic fortunes of the United States and its major economic peers are diverging after six years of financial turmoil.

Benchmark 10-year U.S. Treasury yields rose to their highest in over a month, while European stocks shrugged off weakness in Asia to inch higher.

A broad rise for the greenback was the main bet of most major investment houses this year but it has taken a very long run of relatively good U.S. numbers and a surge in concern over European and Japanese growth for the currency to deliver.

Investors are convinced a Federal Reserve meeting next Wednesday will rubberstamp a shift towards higher interest rates next year suggested by a study by researchers from the U.S. central bank this week.

A 2 percent rise on the week in response took the U.S. currency to a six-year high of 107.39 yen on Friday. Against the euro it gained 0.2 percent on the week at 1.2921, broadly flat on the day.

"The dollar generally remains firm but the dollar index has started to show some hesitation," Swedish bank SEB said in a note to clients on Friday.

The dollar index, a measure of the greenback's value against a basket of six major currencies, remained on course for its longest streak of weekly gains since the first quarter of 1997.

A range of political shocks to the system, from turmoil in the Middle East to fighting in Ukraine and a referendum on Scottish independence, have added to the backing for the dollar against a range of emerging and developed world currencies.

But the euro, hammered by worsening economic numbers and further easing of monetary policy by the European Central Bank in the past month, has begun to find some support in the last few days.

Sterling was also looking more robust, helped by a poll that showed supporters of preserving Scotland's 300-year old political union with England four points ahead with less than a week to go before the Sept. 18 vote.

The poll also helped Britain's top equity index rise for the first time in six sessions, driven by Scottish-based shares such as Royal Bank of Scotland, soft-drink group AG Barr and utility SSE.

CARRIED BACK

The rise in volatility on currency markets - at a four-year high on sterling on Friday - more broadly has prompted some investors to pare back on carry trades, where they borrow at low rates in euros and yen to buy higher-yielding assets such as commodity-linked or emerging market currencies.

Victims included the Canadian dollar, which plumbed a five-month low of C$1.1030, while Australia's dollar hit a six-month low of $0.9053.

The dollar gains have also pushed oil prices to their lowest in two years, while gold sank to an eight-month trough and copper fell to a three-month low.

In contrast, the dollar's gains on the yen were considered positive for Japanese exports, corporate earnings and equities. The broad Topix index added 0.2 percent and reached its highest level since July 2008.

Stocks elsewhere in Asia fared less well as investors fretted that even the hint of a shift in Fed policy might spark a withdrawal of funds from emerging markets. MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.3 percent at one-month lows.

In Europe, Germany's DAX and France's CAC 40 were down 0.2 and 0.1 percent respectively.U.S. retail sales numbers later Friday may fuel speculation over interest rates. Economists expect a solid rebound of 0.6 percent in August, up from a disappointingly flat reading in July and fuelled by a boom in auto sales.

A strong result would only add to speculation the Fed might refine, or even drop, its commitment to keeping rates low for a "considerable time" after its asset purchase programme ends. That has put yields on two-year Treasuries on track for their highest weekly close since April, 2011.

"The market will be on the defensive going into next Wednesday's Fed meeting due to the growing contingent who are convinced a hawkish language change is imminent," said William O'Donnell, head of Treasury strategy at RBS.

"But bearish expectations may surpass what the Fed will deliver," he added. "We think September is a bit premature for a language change and that the Fed is just looking to have the conversation."

(Editing by Catherine Evans)