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FOREX-Dollar set for biggest weekly drop in a month; U.S. data eyed

Saikat Chatterjee

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

LONDON, Sept 6 (Reuters) - The dollar edged lower on Friday and was heading for its biggest weekly drop in a month as expectations grew that the Federal Reserve would cut U.S. interest rates this month.

Traders bought the Australian dollar and other risky assets this week after the U.S. reported strong economic data and political tension eased, especially in the United Kingdom, where lawmakers moved to block Prime Minister Boris Johnson's efforts to leave the European Union without a transition agreement.

A dollar index slipped 0.1% lower to 98.32 and was down 0.54% so far this week, its biggest weekly drop since early August.

"The latest risk rally rests on a number of pillars like the recent upbeat U.S. data, receding political risks in the UK and hopes for an abatement of the US-China trade tensions," said Valentin Marinov, head of G-10 FX research and strategy at Credit Agricole in London.

Surveys suggested the U.S. economy was in better shape than investors had feared. Services activity accelerated in August and private employers increased hiring more than expected.

A U.S. non-farm payrolls report due later on Friday was expected to show 158,000 jobs were added and the unemployment rate remained unchanged at 3.7% in August.

Despite the upbeat data, bond markets expect the Fed to cut interest rates this month. A total of 55 basis points of rate cuts are expected this year.

A combination of likely dovish central banks and decent economic data also encouraged investors to buy the Canadian dollar and the Swedish crown against the U.S. dollar.

China's yuan was mostly flat, though on track for its first weekly gain in three weeks.

"Investors are now hoping they can take this week's positivity over the finishing line, so fingers crossed the August U.S. payroll report ... doesn't throw a damp towel on the proceedings," said Stephen Innes, Asia Pacific market strategist at AxiTrader.

The optimism of the past few days bolstered the South Korean won and the Australian and New Zealand dollars , setting them on course for their best weekly gains since June, each adding more than a percentage point against the U.S. dollar.

(Reporting by Saikat Chatterjee; additional reporting by Tom Westbrook in Singapore; editing by Larry King)