* Dollar on pace for weekly gain of 0.8 pct
* Euro weakens as political risks loom
(Updates prices, market activity)
By Saqib Iqbal Ahmed
NEW YORK, Feb 23 (Reuters) - The dollar edged higher against a basket of major currencies on Friday, extending its recovery from a three-year low last week, as the potential for a more aggressive U.S. Federal Reserve prompted investors to pare bearish bets against the greenback.
The dollar index , which measures the greenback against a basket of six other major currencies, was up 0.12 percent at 89.847. The index hit a three-year low of 88.253 on Feb. 16.
"You have seen sentiment around the dollar shift," said Charles Tomes, senior investment analyst and trader at Manulife Asset Management in Boston.
"A lot of market participants are taking some risk off the table if they did have longs in other strategies," he said.
Rising U.S. Treasury yields, a view that the dollar's selloff had been overdone, and minutes from the Fed's January rate-setting meeting that offered a relatively upbeat tone helped the index notch a gain of 0.8 percent this week.
"The story defining the dollar's impressive appreciation this week continues to revolve around heightened speculations of higher U.S. interest rates in 2018," Lukman Otunuga, research analyst at futures brokerage FXTM in London, said in a note.
The Fed, looking past a recent stock market sell-off and concerns about inflation, sees steady growth continuing and no serious risks on the horizon the might pause its planned pace of rate hikes, the central bank's Washington-based Board of Governors wrote in its semiannual report to Congress on monetary policy.
The report was released Friday ahead of new Chairman Jerome Powell's first public outing next week, when he testifies separately before House and Senate committees. "If investors were short the U.S. dollar, they don't wantto take on that risk in case he is more hawkish," Tomes said.
The euro edged lower against the dollar, pressured by the greenback's stronger tone and by investor caution ahead of the outcome of the Italian general election on March 4.
A German Social Democrats' poll of its members on joining another coalition government with Chancellor Angela Merkel's conservatives is also due that day, two big political risk events for markets.
"For people that are bullish on the euro, there is nothing new to get people to increase positions," he said.
The kiwi slipped as investors bet interest rates in New Zealand will remain at record lows while the United States continues to tighten policy. The Canadian dollar rose against its U.S. counterpart after data showed Canada's inflation cooled less than economists had expected. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: World FX rates in 2018 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>(Reporting by Saqib Iqbal Ahmed Editing by Chizu Nomiyama)
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.