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 https://tmsnrt.rs/2RBWI5E

By Elizabeth Howcroft
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 =USD . 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 EUR=EBS .
Riskier currencies fell, with Australian dollar set to end
the week down 3.5%, its worst week since March AUD=D3 , and the
New Zealand dollar down 3% on the week NZD=D3 .
The Norwegian crown reached new three-month lows against the
dollar, down 0.9% on the day at 9.5785 at 1140 GMT NOK=D3 ,
also down around 0.5% against the euro EURNOK=D3 .
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
JPY=EBS , while the Swiss franc gained around 0.1% against the
euro, at 1.08 EURCHF=EBS .

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