June 21, 2013 / 4:25 PM / 5 years ago

FOREX-U.S. dollar on pace for best week since late 2011

* Dollar rallies on prospects of Fed scaling back stimulus

* Euro hits two-week low vs dollar; Greece turmoil returns

* Yen, Swiss franc may gain on emerging market turbulence

By Wanfeng Zhou

NEW YORK, June 21 (Reuters) - The U.S. dollar was headed for its biggest weekly gain since late 2011 against major currencies on Friday, after the Federal Reserve laid out its plans Wednesday to begin scaling back its economic stimulus efforts.

The euro fell to a two-week low against the dollar as interest rate differentials moved in favor of the U.S. currency and on a re-emergence of Greece’s political turmoil.

The dollar surged and assets like stocks and bonds fell after Fed Chairman Ben Bernanke said on Wednesday the economy was improving enough for the central bank to begin reining in its monthly $85 billion in asset purchases. That prompted traders to start pricing in an interest-rate hike in late 2014.

“We’re very bullish right now on the U.S. dollar,” said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

Woolfolk said the dollar was likely to gain regardless of Fed actions. If the economy improves and the Fed cuts back on its stimulus, the dollar will benefit from expectations of higher interest rates. But if the Fed maintains stimulus because the economy is weak, the dollar will rise on safe-haven demand, he said.

Against the currency basket, the dollar rose to 82.440 , the strongest since June 6. It was last up 0.6 percent at 82.383 and was on track for a weekly gain of 2.2 percent, the biggest since early November 2011.

Analysts said expectations of the Fed slowing the pace of its stimulus also led to a degree of uncertainty in financial markets, which will also boost the dollar.

“Players will likely park (assets) in the dollar until we have got a little more clarity about where the world is going,” said Neil Jones, head of hedge fund FX sales at Mizuho Corporate Bank in London. “The dollar is benefiting from that and I sense it will continue to do so.”

The euro fell 0.7 percent to $1.3118, having hit a two-week low of $1.3114.

Greece’s Democratic Left party may pull out of Greece’s ruling coalition on Friday after talks to resume state television broadcasts collapsed, plunging the nation into fresh turmoil. The news sent the country’s borrowing costs to their highest since April.

Traders said with the yield gap between 10-year Treasuries and German Bunds rising to its highest since late April 2010 in favor of the former, investors were looking to initiate fresh bets against the euro. During that time three years ago, the euro fell from a high of above $1.34 to below $1.20.

On Friday, the dollar gained 0.2 percent against the yen to 97.47 yen, not far from its 98.28-yen intraday high on Thursday.

On the week, the euro fell 1.7 percent against the dollar, the biggest weekly loss since early February. The dollar rose 3.7 percent versus the yen, the biggest weekly rise December 2009.

“Demand from Japanese investors for Treasuries will pick up and we are expecting the U.S. economy to keep growing. The Fed is likely to start tapering (stimulus measures) in September and this is very encouraging for dollar/yen,” said Yujiro Goto, FX strategist at Nomura.

Some traders said higher U.S. interest rates could prompt a stampede out of emerging markets. Such a development could favor traditional safe-haven currencies such as the yen and the Swiss franc.

Goldman Sachs, in a note to clients, said tighter monetary conditions by major central banks, especially the Fed, could trigger declines in a number of emerging market currencies in the years ahead.

“Although some of the recent shifts may prove to be overshoots in the short term, the (emerging market, or EM) bond and FX sell-off of the last month is likely to constitute only a small part of a longer trend for EM assets,” they said.

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