A shift in mindset among currency investors, who are now buying dollars on good news about the U.S. economy, may help the greenback in a week highlighted by a Federal Reserve policy meeting and data on retail sales.
Investors are set to scrutinize a wide range of economic data next week, and the dollar could benefit if they continue to bolster optimism about the economy, analysts said.
The dollar on Friday hit its highest since mid-June against the yen and rallied versus a basket of currencies after a stronger-than-expected jobs report stoked expectations that the U.S. economy was on the mend.
For much of the past few months, the dollar has tended to fall after upbeat numbers on the economy, as expectations of recovery prompted investors to take on more risk and eroded demand for safe-haven currencies like the greenback.
That dynamic, which pushed the dollar to a 10-month low against a basket of currencies and a 2009 low versus the euro earlier this week, may be changing, analysts said.
We may be at a juncture now where the dollar is going to get strength on better growth differentials, said Boris Schlossberg, director of currency research at GFT Forex in New York. The U.S. economy is the first to recover, and therefore (the dollar) deserves a premium based upon much stronger growth potential.
The jobs data on Friday followed other recent upbeat reports on the U.S. manufacturing and housing sectors, which lifted hopes that the U.S. economy will outperform other developed regions, making dollar-denominated assets more attractive.
The ICE Futures U.S. dollar index, which measures the greenback against a basket of currencies, last was up 1.1 percent to 78.907 .DXY, and was track for a gain of 0.7 percent this week.
On the week, the euro fell 0.5 percent versus the dollar, and the dollar rose 3 percent against the yen, the best weekly gain since early June.
It will be interesting to see how the U.S. dollar responds to (economic data) next week should they be very positive, said Sacha Tihanyi, currency strategist at Scotia Capital in Toronto. I think we can expect this type of positive data to eventually become more and more U.S. dollar supportive.
After a surprise move by the Bank of England on Thursday to expand its quantitative easing program, currency investors will pay close attention to a policy meeting by the U.S. Federal Reserve, which begins its two-day meeting on Tuesday.
Market participants will scrutinize a statement to be released at the end of the meeting on Wednesday for clues about the Fed's assessment of the economic outlook and any details about its quantitative easing measures.
Because of the surprise action by the Bank of England, there'll be even more interest and anxiety over the Fed's meeting, said Paresh Upadhyaya, portfolio manager at Putnam Investments in Boston. On the U.S. economic calendar, international trade data for June is due out on Wednesday and retail sales for July on Thursday. July consumer prices and industrial production and consumer sentiment for August will all be released on Friday.
In the euro zone, investors will brace for second-quarter gross domestic data.
Amid persistent worries about the United States's ability to finance its ballooning debt issuance, also grabbing attention next week will be the Treasury's hefty $75 billion auctions of three-year notes, 10-year notes and 30-year bonds.
With the global economy and financial markets stabilizing, analysts said focus may also begin to shift to the impact of the stimulative monetary and fiscal policies in the United States, which will weigh on the dollar.
Given the move that we've seen in the dollar index, it would not be surprising to see a near-term correction or some strength in the dollar, but I think that would be short-lived, Putnam's Upadhyaya said.
(Editing by Chizu Nomiyama)