Fresh off its strongest month in nearly a year, the dollar looks set to extend its rally next week on signs the Federal Reserve is on hold after seven months of aggressive interest rate reductions that drove the U.S currency to record lows.
The Fed behaved largely as expected this week by cutting the benchmark U.S. interest rate by a quarter percentage point to 2.0 percent and by backing away from its previous assurance that it would continue lowering borrowing costs.
Analysts said the Fed's statement lacked the explicit signal that its easing cycle was over, but concerns that it might cut rates yet again eased after a run of economic data that was somewhat stronger than market forecasts.
Friday's employment report from the U.S. Labor Department, in particular, allayed worry that rates could go still lower and do fresh damage to the dollar.
While U.S. employers cut jobs for a fourth straight month in April, job losses were not as steep as feared, and the unemployment rate fell unexpectedly to 5 percent.
"The market thinks the Fed is in neutral, so in the bigger picture it has to be supportive of the dollar," said Ron Simpson, director of FX research at Action Economics in Tampa, Florida.
For the week, the euro fell 1.3 percent against the dollar while, the dollar gained 0.9 percent against the yen .
It was the dollar's second straight week of gains against the euro and the third consecutive week of gains against the yen.
The New York Board of Trade's U.S. dollar index, which measures the dollar's performance against a basket of currencies, gained 1 percent for the week, it's third straight weekly gain.
In the latest good news for the U.S. economy and the dollar, the Labor Department said 20,000 jobs were shed last month, far fewer than the 80,000 that economists polled by Reuters had anticipated would be lost.
That followed upwardly revised losses in March and February.
But the unemployment rate eased to 5 percent in April from 5.1 percent, contrary to forecasts that it would pick up to 5.2 percent.
"The relative strength of U.S. economic data in recent days has supported the dollar and, combined with the Federal Reserve announcement, the market-implied probability of a June rate cut is less than 20 percent," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.
Relatively higher U.S. interest rates raise the attractiveness of dollar-denominated securities and increase demand for the dollars to buy them.
"The dollar index appears to have made a significant bottom, which likely coincides with the Fed likely pausing on further easing, " said Andrew Bekoff, chief investment strategist at Meyers Associates L.P.
in New York? On a technical basis there is dollar index minor resistance in the 74 to 74.25 area, Bekoff said, with the dollar index last trading at 73.540.
The dollar may also be bolstered against the euro by expectations that, in contrast to the United States, a run of weak sentiment data in the euro zone may prompt the European Central Bank to soon tone down its hawkish rhetoric and set it on a gradual path toward signaling eventual monetary easing.
Bekoff's short-term downside target is 1.5150 on the euro/dollar, with the pair last changing hands at 1.5409.
Upcoming data could cause some intraday volatility but is not expected to upset the overall trend for the dollar in the near term.
The Institute for Supply Management's non-manufacturing index is set for release Monday and is expected to post a reading of 49.0 for April, just down from the 49.6 reading in March.
More housing data is to be released Wednesday, with pending home sales data for March expected to show a 1 percent decline, slower than the 1.9 percent drop in February.
Investors may even see as good news given housing's drag on the economy in recent months.
Weekly jobless claims are set for release Thursday.
Rounding out the week is international trade for March, which is expected to post a deficit of $61.7 billion Friday.