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Dollar Cruises to Third Weekly Win, Stocks Bounce

The dollar cruised to its third straight week of gains on Friday as stock and commodity markets showed signs that they might be able to manage another U.S. interest rate hike in the coming months.

With risk appetite gradually returning after bumpy few days, European shares opened up 1.2 percent and sterling topped the leaderboard of weekly currency winners on fading Brexit bets.

Image: Freshly cut stacks of $100 bills
Freshly cut stacks of $100 bills make their way down the line at the Bureau of Engraving and Printing Western Currency Facility in Fort Worth, Texas. LM Otero / AP

The share gains were helped by a 5 percent jump for Italy's biggest bank UniCredit on reports it plans to sell parts of its business to improve its finances and as commodity stocks cheered higher oil and metals prices.

The dollar, a dominant force in markets this week, was keeping close to two-month highs after it had passed $1.12 per euro and 110 yen for the first time since March, buoyed by a jump in U.S. bond yields.

"The question for traders now is whether this Fed rate hike issue is a 'risk-on' or a 'risk-off' situation," said Saxo Bank FX strategist John Hardy.

"Our interpretation is that they want to do a June move, especially now Brexit chances seem to have dropped right off."

The Swiss franc, the largest beneficiary among currencies of the shakiness that has clouded the global economy since the 2008 financial crash, was set to close at its weakest since a dramatic revaluation in January of last year.

German Bund yields were heading for their biggest weekly rise in a month while Britain's pound, despite a dip on the day, was on course for its strongest week against the euro since last October.

Currencies are likely to be a topic at the G7 finance leaders' meeting in Japan on Friday and Saturday. The meeting could expose differences on a range of issues from FX tinkering to broader fiscal and interest rate policies.

New York Federal Reserve President William Dudley, a permanent voting member of the central bank's rate-setting committee, said there was a strong sense among Fed officials that markets were underestimating the probability of U.S. rate hikes.

Dudley said he was "quite pleased" investors had apparently increased bets that a rate hike would come soon.

Markets are pricing in a 32 percent chance of a rate hike in June, according to the CME FedWatch tool, up from 15 percent on Tuesday. A majority now expect a rate hike at the July meeting.

"The Fed has regained the upper hand here," strategists at Brown Brothers Harriman said. "Moreover, the response by the dollar and the interest rate markets suggest monetary policy still matters."