RTRS: Dollar heads for biggest weekly gain since May on U.S. rate view
* Dollar index on track for 1.5-percent gain
* Focus shifts back to Fed hike risk from Greece
* Sterling up after BoE's interest rate comments
By Jemima Kelly
LONDON, July 17 (Reuters) - The dollar was on track for its biggest weekly gain in two months on Friday as investors refocused on the chance of the first U.S. interest rate rise since 2006 by the end of the year.
The greenback has clocked up a 1.5 percent rise against a basket of currencies in a week in which Federal Reserve Chair Janet Yellen reiterated that U.S. rates were likely to increase this year, while the head of the European Central Bank said policy would remain ultra-loose.
Currency investors have been distracted for weeks by uncertainty over whether Greece and its creditors would come to an agreement and avoid "Grexit" from the euro. The deal was done on Monday, turning the market's focus back to fundamentals.
"Part of the dollar recovery is because the clarity on Greece helps the euro come back in lower ... That gets the focus back on moving towards policy normalization," said Saxo bank's head of FX strategy, John Hardy.
"We had a pretty hawkish speech from Yellen, relative to what we normally expect (so) the market is going to take note of that."
Most traders and strategists reckon the diverging policy outlook between the euro zone and the United States should see the euro continue to weaken, with many betting that it will fall below $1 in the next year.
The euro added about 0.1 percent on Friday to $1.0887 , not far off a 7-1/2 week low of $1.0855 set overnight and still down more than 2 percent on the week.
"The focus is turning to the U.S. rate cycle, and (the market reckons) a September rate hike is still, if not probable, at least possible," RBC Capital Markets global head of FX strategy, Adam Cole, said. "From now the euro goes down primarily because the dollar is going up."
Sterling hit a 7-1/2-year high against the euro of 69.445 pence, after Bank of England Governor Mark Carney gave his strongest hint yet on the timing of a UK rate rise, saying a decision on that would come into focus around the end of 2015.
The greenback was down about 0.1 percent on the day against the yen after touching a one-month peak of 124.235 yen, still on track to gain more than 1 percent for the week. (Additional reporting by Lisa Twaronite in Tokyo and Ian Chua in Sydney; Editing by Toby Chopra)
