Dollar may rebound in coming week
Better-than-expected corporate earnings have encouraged investors to move assets out of the safety of the dollar as stocks have trended higher.
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NEW YORK (Reuters) -- Strong corporate results have done wonders for market confidence this week, pushing investors to ditch the safe-haven dollar for higher-yielding currencies, but the greenback may be due for a modest rebound in the week ahead.
The second quarter has been kinder to U.S. companies than many had expected, with the likes of Goldman Sachs (GS, Fortune 500), Intel (INTC, Fortune 500), JPMorgan (JPM, Fortune 500) and Apple Inc. (AAPL, Fortune 500) all surpassing market estimates.
That, coupled with strong business sentiment and factory data from the 16-country euro zone, helped boost foreign currencies at the expense of the dollar and sent the Dow industrials above 9,000 for the first time since January.
But there were worrisome signs, too. Microsoft (MSFT, Fortune 500) and American Express (AXP, Fortune 500) results disappointed the market, while the UK economy shrank more than twice as fast as expected between April and June, knocking the wind out of sterling Friday.
"Next week could be one for consolidation. We've had such big gains, and if equities fall back a bit, we could see some flows pour back into the dollar," said Boris Schlossberg, director of FX research at GFT Forex in New York.
The dollar has weakened over the last year in times of market optimism that have stoked buying of higher-yield currencies and assets, but it has rallied when doubt about global economic health grows.
Brown Brothers Harriman strategist Meg Browne said several currencies and equity indexes have rallied toward key technical levels, suggesting a pullback may be coming.
The euro failed to test 2009 highs above $1.43 even on Thursday when Wall Street soared, suggesting momentum may be fading a bit, she said.
Morgan Stanley (MS, Fortune 500) currency strategists also expect the yen could firm against the dollar next week, helped by proposed margin limits on FX retail trading in Japan and Japanese profit repatriation.
GFT's Schlossberg said markets have seen "the first hints of decoupling between equities and currencies" and said traders may start looking a bit more closely at economic fundamentals to drive their currency allocations.
Strong euro zone data this week helped the euro, he said, while the pound fell after data showed that Britain's economy contracted 0.8% in the second quarter and 5.6% in the 12 months to June, the steepest fall since such records began in 1955.
Investors next week will focus on the U.S. economic calendar, with Friday's U.S. second-quarter gross domestic product report topping the week's offerings. Most economists expect to see contraction in the neighborhood of 1.5%, though many see a return to positive growth later in the year.
Vassili Serebriakov, a strategist at Wells Fargo (WFC, Fortune 500), said a number that beats expectations would likely whet investor risk appetite for now, to the detriment of the dollar.
"Eventually, the correlation between equities and the dollar will break and positive news for the U.S. economy will also help support the dollar instead of hurting it," he said.
But for now, he said, those links remain fairly durable, adding the euro may make another run at breaking $1.4337, its 2009 high, before dollar buyers reenter the market.
Browne said she was still bullish on the Canadian dollar, which was approaching its 2009 high against the greenback, but said caution is in order.
"There's room for a pullback, but (equity and foreign currency) gains may still have legs," she said. "So the way to trade is to be very cautious, to put in fairly tight stops in case there's a big correction." 
