By Kevin Buckland

TOKYO (Reuters) - The Australian dollar hit its strongest level in a week on Wednesday against safe-haven currencies the dollar and yen amid a pick-up in risk appetite on signs that Omicron may be less severe than other COVID-19 variants, but still vulnerable to existing vaccines.

The Aussie rose as high as $0.71425 and 81.07 yen, levels not seen since Dec. 1.

British drugmaker GSK said on Tuesday its antibody-based COVID-19 therapy with U.S. partner Vir Biotechnology (NASDAQ:VIR) is effective against all mutations of the new Omicron coronavirus variant.

Meanwhile, the Reserve Bank of Australia said Omicron was not expected to derail the country's economic recovery.

Investors had already cheered comments from the weekend that cases in South Africa - where the Omicron strain was first identified - showed milder symptoms, with the top U.S. infectious disease official, Anthony Fauci, adding "it does not look like there's a great degree of severity" so far.

For the week, Australia's currency is up 1.84% against the greenback, setting up its best performance in three months. It has rallied 2.42% versus the yen, on track for its best week since mid-October.

"Markets continue to travel with a good deal of optimism that Omicron will not have the severity of prior variants in terms of health outcomes, even if it is more transmissible," Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY), wrote in a client note.

That's put risk asset markets in "ebullient mood," lifting stocks, as well as riskier currencies including the Australian and Canadian dollars, he said.

Asian stocks continued the strong gains seen on Wall Street overnight, with an index of regional stocks advancing 0.6% on Wednesday.

The Canadian dollar marked a two-week high at C$1.26325 per greenback.

The Bank of Canada decides policy later on Wednesday, and while economists expect no change at that meeting, they forecast rate hikes as early as the middle of next year in a recent Reuters poll.

The U.S. Federal Reserve meets next week, with policymakers flagging in the run-up that an increase in the pace of stimulus tapering is likely, which would set up the possibility of earlier rate hikes.

The JOLTS report on U.S. job openings due later on Wednesday should provide further evidence of a tightening labour market, potentially adding fodder for bets on earlier Fed tightening.

Money markets are currently fully priced for a quarter point rate increase by June.

The dollar index, which measures the greenback against six major peers, slipped 0.14% to 96.150, settling near the middle of its range over the past 2-1/2 weeks.

Treasuries gave no support, with the yield on the benchmark 10-year note retreating further from Tuesday's high since Dec. 1 of 1.4870%, sinking to 1.4648%.

The dollar-yen pair tracked that move, edging down to 113.49 from a one-week high of 113.78 overnight.

The Chinese yuan hit the highest since May 2018 against the dollar in offshore trading, strengthening as far as 6.3509.

"There was no immediate catalyst for the move lower" in the dollar-yuan pair, but "the general improvement in risk sentiment as Omicron fears fade is a weight," Commonwealth Bank of Australia (OTC:CMWAY) strategist Kimberley Mundy wrote in a research note.

The British pound recovered a bit of composure, adding 0.08% to $1.32545 and consolidating around the middle of this week's trading range.

The euro rebounded 0.23% to $1.1293 after touching its lowest since Nov. 26 at $1.1228 in the previous session.