FOREX-Dollar heads for big weekly loss, political tensions boost yen

* Dollar on course for loss of 1% this week after Fed
* Yen hits five-month high; Iran-U.S. tensions flare
* Euro traders eye flash PMI data due at 0800 GMT
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

By Tommy Wilkes
LONDON, June 21 (Reuters) - The dollar was headed for a big
weekly loss on Friday, touching a five-month low against the
Japanese yen and struggling versus the euro after a dovish shift
by the Federal Reserve.
In joining the European Central Bank by opening the door to
interest rate cuts and more stimulus to counter an economic
slowdown, the Fed sent the dollar to its biggest two-day loss of
2019.
Forex markets were much quieter on Friday, however, as
traders took stock.
The focus now shifts to whether the United States and China
can resolve their trade row at a Group of 20 leaders summit in
Japan next week.
Presidents Xi Jinping and Donald Trump are due to meet on
the sidelines of the G20 next weekend, but analysts say chances
of a decisive breakthrough are low. An escalating dispute between the United States and Iran
after the downing of an unmanned U.S. surveillance drone also
supported buying of the safe-haven yen, which hit a five-month
high on Friday. "The yen is continuing to benefit from the dovish shift in
Fed and ECB policy alongside other low-yielding currencies such
as the Swiss franc," said MUFG analysts in a note.
The yen rose as high as 107.04 yen per dollar JPY=EBS
before settling at 107.3.
Money markets are pricing in three Fed rate cuts before
year-end, starting with the next meeting in July, and tipping as
many as five cuts through mid-2020. FEDWATCH
That could undermine the dollar but some analysts also say
that given it still yields more than other major currencies it
is likely to remain in demand.
The dollar index .DXY , which measures the greenback
against a basket of currencies, fell 0.1% to 96.495, its lowest
for two weeks.
The euro EUR=EBS hit a new weekly high of $1.1319, up 0.2%
on the day, after French and German business activity
strengthened more than expected in June, according to surveys.
"The dollar's upside is capped, because we are already
looking past the Fed's July meeting for more rate cuts," said
Junichi Ishikawa, senior foreign exchange strategist at IG
Securities.
"Central banks are in a competition to ease policy, so it's
a question of which currency to sell. There are some hopes
surrounding G20, but we've been here before only to be
disappointed."
Sterling changed hands at $1.2699 GBP=D3 . The Bank of
England on Thursday struck a less dovish tone than other central
banks but cut its second-quarter growth forecast, capping a
pound rally.