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UPDATE 2-Sterling set for best day in one week as risk appetite returns

* Graphic: World FX rates in 2020 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Updates headline, lead, rates, adds quotes)

LONDON, July 9 (Reuters) - Sterling bounced back versus a weakening dollar on Friday and was set for its best day in a week as risk currencies tried to recover after being hurt by a broader shakeout in FX markets.

Sterling rose to $1.3873 on Friday against a softening dollar. It was 0.3% up by 1525 GMT in a tentative move to cut losses from the previous session.

A shakeout in foreign exchange markets on Thursday saw riskier currencies such as the pound fall and safe havens gain as a surge in cases of the Delta coronavirus variant hit global sentiment.

Versus the euro, sterling rose 0.2% at 85.71 pence, after having its worst day in two months on Thursday as the European Central Bank set a new inflation target, which gave the euro a broad boost.

Capping sterling declines this week, transport secretary Grant Shapps said fully vaccinated UK residents returning from medium-risk amber list countries would from July 19 no longer have to quarantine when they arrive home.

The move was seen as an indication that the recent increase in COVID-19 cases was not set to derail re-opening plans, analysts said.

Investors had remained cautious as the government confirmed this week plans to end social and economic COVID-19 restrictions in England on July 19, but also warned that the number of coronavirus cases could climb as measures were relaxed.

Sterling has been among the top performing G10 currencies this year following Britain’s quick vaccination rollout, which encouraged hopes for a quick economic recovery.

But data showed Britain’s post-lockdown economic rebound slowed sharply in May with gross domestic product growing by 0.8% from April, much weaker than the median forecast of 1.5% in a Reuters poll of economists.

These “cracks in the so-far very positive recovery story in the UK may leave sterling a bit more vulnerable”, said Francesco Pesole, FX Strategist at ING. (Reporting by Joice Alves, Editing by Chizu Nomiyama and Alex Richardson)

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