* Fed minutes show policymakers cautious about hiking rates
* Aussie hits 7-week high, best weekly gains since end-2011
* Dollar index nurses losses, hits 3-week low (adds Morgan Stanley note on U.S. dollar)
By Anirban Nag
LONDON, Oct 9 (Reuters) - Commodity and growth-linked currencies like the Australian dollar surged on Friday, and were set to end the week on a high note on the back of a risk-taking rally that put the safe-haven yen under pressure.
The dollar index, meanwhile, was set for its second week of losses, after the minutes of the Federal Reserve’s September meeting reinforced investors’ expectations that U.S. interest rates are unlikely to rise until well into 2016.
Thursday’s Fed minutes focused on external factors depressing the outlook for inflation which, analysts said, suggested rates were likely to stay lower for longer, fuelling appetite for riskier assets.
The Australian dollar hit a 7-week high and was set for its strongest weekly performance since late 2011, while oil prices surged to their highest in three months. That lifted some of the gloom that enveloped riskier asset classes like stocks and commodities in August and early September when worries about a global slowdown and China weighed on sentiment.
“A risk rally is very much on, and the dollar-bloc commodity currencies are doing well,” said Jeremy Stretch, head of currency strategy at CIBC World Markets. “Having said that, I would be cautious about chasing them much higher as the Fed is still in play.”
The Australian dollar jumped 1.1 percent to $0.7343 , its highest since Aug. 21 and four percent stronger for the week. The Canadian dollar was trading at a 10-week high, while the New Zealand dollar was up 0.8 percent on the day. The three were the best-performing currencies in the G10 this week.
With investors buying riskier currencies, the yen was under pressure. The dollar was up 0.3 percent at 120.25 yen while the euro was up 1 percent against the yen and 0.7 percent against the dollar, trading around $1.1360.
The Fed’s minutes revealed a deeply cautious central bank that delayed a long-anticipated tightening because policymakers wanted to make sure that a global economic slowdown was not a threat to the U.S. recovery.
Morgan Stanley said in a note on Friday that the dollar’s downward correction was likely to continue with recent repatriation from emerging markets set to take a breather. It had removed all long dollar positioning from its strategic FX portfolio and was instead going short dollar against the Australian dollar, the Indian rupee and the Chilean peso.
“Markets may anticipate a relatively flat U.S. rate profile going forward, which should take some wind out of the dollar’s sail,” their analysts said. (Editing by Toby Chopra/Ruth Pitchford)