The dollar could rally further next week amid signs the sluggishness gripping the US economy is spreading to other regions and the commodity boom might have peaked, diminishing prospects of higher interest rates outside the United States.
Mounting evidence of slowing growth in Europe, Asia and Australia have buoyed the dollar, whose yield appeal has been eroded by the Federal Reserve's aggressive cuts in a bid to prevent a housing recession from seeping into the broader economy.
The dollar surged to a five-month high versus the euro and scaled a five-and-a-half month peak against a basket of six currencies on Friday. The euro dropped as low as $1.5006. Analysts saw more gains next week, with data expected to show the euro zone economy shrunk in the second quarter.
Analysts reckon slowing global growth will push crude oil prices even lower, leaving central banks that have maintained an inflation vigil with no reason to tighten monetary policy. Oil prices have tumbled from a peak of over $147 a barrel last month to below $116 on Friday.
Meanwhile, that drop has improved prospects of the US economy's recovery, and probably reduced the Fed's need to cut rates when other central banks are expected to start easing monetary policy to shore up growth, analysts said.
"We have gone from the decoupling theme that has been driving the dollar to recoupling. The rest of the world is now slowing down. In euro land you are also seeing a real pronounced slowdown that is taking shape," said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston.
"What is happening is that the markets are now anticipating that the G10 central banks are moving away from he tightening bias to an easing bias. That shift is what is having a positive impact on the dollar."
Confirmation of a deteriorating growth picture in the euro area could come from second-quarter gross domestic product (GDP) growth data, expected to show a 0.2 percent contraction after a 0.7 percent expansion in the first quarter.
Even if US retail sales and capital inflows data were to disappoint next week, analysts reckon it would be insufficient to derail the dollar's rally. Analysts also argued the dollar's breach of key technical levels suggested that more gains were in the pipeline.
"Euro/dollar may fall as low as $1.4920, which is not only below the 200-day moving average of $1.5220, but also a major previous resistance and now likely support," said Ashraf Laidi, chief market strategist at CMC Markets in New York.
July consumer inflation data will likely show price pressure remaining elevated, supporting the case for higher US interest rates at some point. Consumers' confidence probably perked up slightly in August, data will also show. Amid a raft of earnings, some of which may miss market forecasts and hurt US stocks, analysts are cautious about the dollar's prospects against the yen.
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