* Dollar index on pace for best weekly gain in 14 months

* Dollar bears unwind positions helping lift USD
(Updates prices, market activity, comments to U.S. market open;
previous LONDON)

By Saqib Iqbal Ahmed and Julien Ponthus

NEW YORK, June 18 (Reuters) – The dollar extended its
advance against a basket of currencies on Friday, building on
the gains logged after the U.S. Federal Reserve earlier this
week surprised markets by signalling it would raise interest
rates and end emergency bond-buying sooner than expected.

The dollar index, which tracks the greenback against
six major currencies, was up 0.38% at 92.23, its highest since
mid April. That puts the index on pace for a weekly gain of
about 2%, its best weekly jump in about 14 months.

The jolt to foreign exchanges was triggered on Wednesday by
Fed forecasts, or ‘dot plots,’ showing 13 of the 18-person
policy board saw rates rising in 2023, versus only six
previously, with the median board member tipping two hikes in

Investors’ risk appetite took another hit after St. Louis
Federal Reserve President James Bullard said on Friday that the
U.S. central bank’s shift this week towards a faster tightening
of monetary policy was a “natural” response to economic growth
and particularly inflation moving quicker than expected as the
country reopens from the coronavirus pandemic.

“I think this is a direct echo of the 2013 taper tantrum.
You are seeing a perceived shift in the Fed’s reaction function
driving investors into the safety of the U.S. dollar,” said Karl
Schamotta, chief market strategist at Cambridge Global Payments
in Toronto.

With investors pricing in a sooner-than-expected tapering of
extraordinary U.S. monetary stimulus, the euro and the yen have
come under selling pressure over the last few trading sessions.

“Essentially, the entire world was short the dollar going
into this, everyone from speculative traders to corporates to
investors,” Schamotta said.

“You are seeing a wholesale unwind here,” he said.

The unwind of sizeable bearish bets against the dollar is
expected to provide support for the greenback in coming days,
investors said.

With a dovish European Central Bank seemingly far behind the
Fed in the monetary policy cycle, traders will be reluctant to
buy euros against dollars.

“The U.S. central bank is one step ahead and as a result USD
is likely to remain well supported against the EUR,” Commerzbank
strategists said in their daily note.

With equity markets hurting, the Australian dollar – seen as
a proxy for risk appetite – was down 0.75% at 0.74945, its
lowest since December 2020..

Sterling extended its fall against the U.S. dollar on
Friday, dropping below $1.39, hurt by the Fed’s hawkish surprise
and an unexpected fall in Britain’s retail sales.

In the world of crypto currencies, bitcoin failed to get a
lift from the news that Spanish bank BBVA would open a
bitcoin trading service to all private banking clients in
Switzerland. Bitcoin was down 3.4% at $36,805.3.

(Reporting by Julien Ponthus and Tom Westbrook; Editing by
Catherine Evans and Andrea Ricci)