By Sinéad Carew

NEW YORK (Reuters) – The euro and sterling dipped against the dollar on Friday as investors bet interest rates would stay lower for longer in Europe and Britain while looking ahead to next week’s U.S. monetary policy meeting.

The dollar index, showing its strongest weekly gain since early May, was last up 0.57% on the day at 90.5810 while the euro was down 0.63% at $1.2099, on track for its biggest weekly decline since the end of April.

A day after the European Central Bank stuck to its dovish stance, ECB policymaker Klaas Knot said that flexible fiscal rules would be needed for years as monetary policy remains constrained.

“ECB policy makers are indicating that inflation rates are way below levels that are needed to put upward pressure on rates,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto.

“That’s cutting away at the euro’s recent rally, putting some downward pressure on it. The biggest contributor to the move we’ve seen overnight is the (euro) weakness as opposed to idiosyncratic dollar positive forces. The dollar’s winning the reverse beauty contest,” Schamotta added.

Sterling was down 0.54% at $1.4098 as traders worried about slower-than-expected growth as the rapid spread of the Delta variant in Britain raised concerns that much of the country may not be able to fully reopen from a COVID-19 pandemic-related lockdown on June 21, as previously hoped.

Currency markets had been sluggish all week in anticipation of Thursday’s release of U.S. consumer prices, which rose 5% year-on-year in May.

But even with the number above expectations, there was little market reaction. Investors seemed to back the Federal Reserve’s assertion that high inflation would be temporary.

Economists see the central bank announcing in August or September a strategy for reducing its massive bond-buying program, but do not expect it to start cutting monthly purchases until early next year, a Reuters poll found.

Traders were still preparing for volatility around the Federal Open Market Committee meeting scheduled for the week ahead, according to Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets

“If you’re starting from a position where you’re already short dollars, since FOMC meetings often have a lot of volatility, you might reduce your short for risk management purposes,” Anderson said.

Meanwhile investors left riskier currencies such as the Australian dollar, which was down 0.72% at $0.7697 after hitting its lowest level for the week while the New Zealand dollar was off 1.01% at $0.7123 after touching its lowest level since May 4.

In cryptocurrencies, bitcoin, which recovered slightly in recent sessions, was on track for a 3% weekly gain and last up 0.3% at $36,817.94 on the day. Ether was last down 3% and set for an 11.7% weekly drop. Both are still trading significantly below their earlier peaks.

(Additional reporting by Elizabeth Howcroft in London; Editing by Emelia Sithole-Matarise, Will Dunham and Pravin Char)

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