Wires

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

Tommy Wilkes

* 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

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 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.

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, which measures the greenback against a basket of currencies, fell 0.1% to 96.495, its lowest for two weeks.

The euro 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. 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. (Additional reporting by Stanley White in Tokyo; editing by John Stonestreet)