FOREX-Dollar heads for second week of losses as yields decline

* Greenback set for 0.5% drop this week after hitting 1-month low

* Benchmark yield fell most in 5 months despite strong U.S. data

* U.S. Treasury FX report due, eyes on Swiss franc

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

By Ritvik Carvalho

LONDON, April 16 (Reuters) - The dollar was set to post a second week of losses on Friday amid an extended retreat in Treasury yields, as investors increasingly bought into the Federal Reserve's insistence it would keep an accommodative policy stance for a while longer.

The benchmark 10-year U.S. Treasury yield dipped to a one-month low of 1.528% overnight, moving further away from March's 1.776%, it highest in more than a year, even in the face of Thursday's stronger-than-expected retail sales and employment data.

San Francisco Fed President Mary Daly said the U.S. economy was still far from making "substantial progress" toward the central bank's goals of 2% inflation and full employment, the bar the Fed has set for beginning to consider reducing its support for the economy.

That echoed Fed Chair Jerome Powell's comments in several speeches over the past week that policymakers will look through near-term rises in prices amid ongoing slack in the labour market.

The dollar index, which tracks the dollar against six major peers, fell to an almost one-month low of 91.487 on Thursday before steadying to 91.521 by midday in London.

It's set for a 0.5% decline for the week, extending the 0.9% slide from the previous week.

The gauge, also known as the DXY, had surged with Treasury yields to an almost-five-month high at 93.439 on the final day of March. Traders were betting that massive fiscal spending coupled with monetary easing would spur faster U.S. economic growth and higher inflation.

But bond and foreign-exchange markets now seem willing to give the Fed the benefit of the doubt that inflation pressure will be transitory and monetary stimulus will remain in place for years to come.

"One of the biggest perceived risks to the 2021 recovery story playing out in financial markets is a bond tantrum – or a disorderly rise in U.S. yields," ING's global head of markets and regional head of research for UK and CEE, Chris Turner said.

"Thus, it has been surprising this week to see the large decline in U.S. yields, despite above-consensus U.S. CPI and retail sales."

Retail sales increased 9.8% last month, beating expectations for a 5.9% rise. First-time claims for unemployment benefits fell last week to their lowest in more than a year, separate reports showed Thursday.

The dollar traded flat at 108.74 yen, heading for a 0.8% loss for the week, following a 0.9% decline the previous week.

"We are tempted to say that DXY made an important corrective high at 93.44 at the end of March – and is now heading for a retest of the year’s lows at 89.21," Turner said.

The dollar also lost ground to the Swiss franc, which hit its highest against the greenback in over six weeks. The franc traded 0.4% higher to the dollar at 0.9185 francs per dollar.

The U.S. Treasury releases its latest foreign exchange report today, in which it is expected to name Switzerland as a currency manipulator.

The euro changed hands at $1.1995, set for a 0.5% weekly advance, adding to the previous period's 1.3% surge.

Some analysts also pointed to Wall Street's strong gains, with the S&P 500 and Dow both posting record highs, as weighing on the safe-haven dollar amid increased risk appetite.

"From a cross-asset perspective, we are seeing a theme in markets, which seems similar to last year in the sense of falling real U.S. yields, rising commodities, declining vol, strengthening equities and general dollar weakness," said Mikael Olai Milhøj, chief analyst at Danske Bank.

Economic data from China on Friday ultimately had little effect on currencies, even though the world's second-largest economy posted record 18.3% growth in the first quarter year-on-year.

The Chinese yuan slipped 0.1% to 6.5230 per dollar in the offshore market.

In cryptocurrencies, bitcoin stood around $60,492, below the record high of $64,895 reached on Wednesday, when cryptocurrency platform Coinbase made its debut in Nasdaq in a direct listing.

(Reporting by Ritvik Carvalho; additional reporting by Kevin Buckland in Tokyo; editing by Simon Cameron-Moore, Larry King)