FOREX-Dollar heads for flat week as inflation trade revives

* Dollar index gains for second day

* Dollar bulls encouraged by stock market surge

* Traders say franc bolstered by J&J deal

* Graphic: World FX rates in 2016 http://tmsnrt.rs/2egbfVh

By Patrick Graham

LONDON, Jan 27 (Reuters) - The dollar recovered more ground against a basket of currencies on Friday, catching up with rises in U.S. stock markets and bond yields as the trade on U.S. President Donald Trump's growth policies moved back to pole position in investors' thinking.

The dollar has climbed for two days, pulling it back from 7-week lows and leaving it flat on the week, as markets refocused on Trump's pro-business policies and expectations the currency would gain from a rise in border tariffs, tax reform and future spending.

The 4 percent fall in the dollar in the three weeks from Jan. 3 was a reflection of doubts about how the new president's policy mix will play out for the currency, particularly after both Trump and Treasury Secretary nominee Steven Mnuchin hinted at concerns over its strength.

But many analysts cast it simply as a necessary adjustment to market positioning before the dollar can deliver on what were widespread expectations of a strong rally in 2017.

"The market is back on this positive story about Trump's tax and spending policies. It is gaining on a broad basis," said Antje Praefke, a strategist with Commerzbank (Xetra: CBK100 - news) in Frankfurt.

"Whether these policies are positive for the dollar in the long-term may be a different story. You need more information about what he will actually do and how that will play out and impact the dollar. But for now the market buys the growth story."

The dollar index, which measures its strength against six major peers, gained 0.2 percent to 100.57 in morning trade in Europe, up from a seven-week low of 99.793 hit on Thursday.

It was marginally lower on the day at $1.0694 per euro and half a percent higher at 115.14 yen.

A number of banks, including Bank of America Merrill Lynch and France's Societe Generale (Swiss: 519928.SW - news) , predicted a revival of the dollar rally in weekly notes on Friday.

"There's a sense of expectations ahead of U.S. GDP later today but also a sense of recoupling with the moves that we've seen on yields and stocks," said Viraj Patel, a strategist with Dutch bank ING in London.

"It's just a market realisation that no matter what officials say (about the dollar's strength) there is enough there to be bullish. You cannot deny the impact of the moves they are going to make to reflate the economy."

The Swiss franc, held down by intervention by the Swiss National Bank (LSE: 0QKG.L - news) in the past year, hit a seven-month high on Thursday on news of Johnson & Johnson (NYSE: JNJ - news) 's $30 billion takeover of Actelion (LSE: 0QMN.L - news) .

It was steady at 1.0683 per euro on Friday.

"There was a lot of chatter about this deal yesterday," said a dealer with one bank in London.

"Whether they are actively doing it at the moment we can't say but the franc has certainly proved far stronger than other currencies against the dollar as well."

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Jeremy Gaunt)