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FOREX-Cautious optimism on crucial EU summit lifts euro

(Adds quotes, background on summit)

* Graphic: World FX rates in 2020 tmsnrt.rs/2RBWI5E

* No end in sight to U.S. virus surge

* Dollar supported on safe-haven flows

LONDON, July 17 (Reuters) - The euro was heading for four-month highs on hopes a European Union summit will make progress on a recovery fund that would help lift the EU out of recession and deepen its integration.

No outcome is expected at the summit until evening, at best, but an agreement or a collapse in the talks would have a major impact on the currency when trading resumes.

The euro was up 0.4% against the dollar, at $1.1425, near Wednesday’s $1.1452, its highest since the coronarivus financial crash in March.

“Markets appear to be constructive on the euro in an anticipation of progress towards the recovery fund at the EU summit over the weekend”, said Petr Krpata, a foreign exchange strategist at ING.

The euro could hit the $1.15 level should progress be made, Krpata said.

“This would be also supportive of other European currencies such as the ‘scandies’”, he added.

The dollar was up 0.38% against the Norwegian crown at 9.3085 but still close to its lowest levels since March. It fell 0.43% against Sweden’s crown, which was also near four-month highs.

Implications for the euro should the EU go ahead with its plan would be long-lasting, Marshall Gittler, head of investment research at BDSwiss, told his clients.

A deal “would make the euro more attractive as a reserve currency” by “establishing a central fiscal capacity that can respond to adverse shocks, which would make monetary union more stable”, he said.

Many traders doubt the summit will reach an agreement and assume EU leaders will need to meet again to find a compromise.

Officials said the summit could drag into Sunday if an agreement remains elusive. Luxembourg Prime Minister Xavier Bettel told Reuters he had brought an extra set of clothes just in case.

The euro also made gains against the British pound, up 0.4% at 0.9102 pence. The pound was set for its biggest weekly fall versus the dollar in a month, as uncertainty over Britain’s economy, Brexit talks and a high COVID-19 death toll weighed on the currency.

The pound is on track to be the worst-performing G10 currency this week, after weaker economic data raised concerns over the possibility the Bank of England will introduce negative interest rates.

For the week, the dollar was on course for gains against sterling, the yen and the Swiss franc.

Some investors say they are beginning to see signs that a surge in coronavirus infections is threatening the U.S. economy.

Others point to deteriorating U.S.-China ties as a reason to avoid riskier trades, which should keep the dollar in demand for now.

The dollar stood at 107.11 yen and 0.9410 Swiss franc , close to its highest since July 3. (Reporting by Julien Ponthus, editing by Larry King)

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