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FOREX-Swiss franc falters on returning risk appetite

* Franc set for biggest daily loss in nearly three weeks

* Japanese Q2 GDP data lifts risk appetite

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

LONDON, Aug 14 (Reuters) - The Swiss franc posted its biggest daily drop against the U.S. dollar in nearly three weeks on Monday as investor concern over geopolitical risks eased and Japan posted solid economic data.

"Some investors had gone very short on risk last week on the geopolitical events and there is some short covering," Neil Jones, head of FX sales at Mizuho Bank in London, said.

The franc fell 0.8 percent against the U.S. dollar to 0.9694 francs, its biggest drop since July 27 according to Thomson Reuters data. It gained more than 1 percent last week on escalating tensions between North Korea and the United States.

World stocks also showed signs of relief after fears of a nuclear stand-off drove them to the biggest weekly losses of 2017 last week, while volatility ebbed.

Chinese President Xi Jinping called on Saturday for a peaceful resolution to the North Korean nuclear issue, and in a call with U.S. President Donald Trump urged all sides to avoid words or action that raise tensions.

With Japanese second-quarter growth expanding 1 percent quarter-on-quarter, fuelled by rising consumption and capital expenditure, investors stepped in to buy risky assets after tensions over North Korea.

Meanwhile, the dollar edged higher against a trade-weighted basket of currencies after posting its biggest weekly drop in three weeks as expectations of U.S. rate increases dwindled further after weak inflation data.

Renewed risk appetite also encouraged investors to borrow in currencies such as the dollar and the franc and invest in the euro.

"Despite some near-term headwinds for the euro after the recent rise, it is set to rise against the dollar because of the relatively favourable economic outlook," Rob Carnell, head of research at ING in Singapore, said.

The dollar was trading at 93.30, 0.3 percent higher from Friday's session when it came under pressure after softer-than-expected U.S. inflation data for July dampened expectations for another Federal Reserve interest rate hike this year.

The euro edged 0.2 percent lower to $1.17950 and was below a 2-1/2 year high of 1.1910 hit earlier this month.

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(Reporting by Saikat Chatterjee)