FX OUTLOOK-Bias in dollar's favor as US, euro zone data loom

NEW YORK May 9 (Reuters) - The dollar could gain modestly next week provided April U.S. retail sales don't fall more than expected when data is released on Tuesday, and as investors focus on any more signs of slowing growth in the euro zone.

Analysts said market perceptions that the euro's rally since September was running out of steam should also support the dollar in a week loaded with economic data from both the United States and Europe.

"As far as the U.S. data goes, retail sales are going to be important because they are going to show just how much of a toxic effect gas prices have had on consumer behavior," said Boris Schlossberg, senior currency strategist at DailyFX.com in New York.

"We generally see a mild skew to the downside in euro/dollar. We see dollar strength next week, with 1.50 as a potential target if U.S. consumers do not appear to be as weak as everybody expects them to be."

A Reuters survey predicted overall retail sales contracting by 0.1 percent in April after growing by 0.2 percent in March. But higher gasoline prices tend to inflate the number and make it less representative of overall sales.

Consumer spending accounts for about two thirds of the United States' gross domestic product. A recession in the housing sector has crimped consumers' ability to spend, contributing to a sharp growth slowdown and aggressive interest rate cuts by the Federal Reserve.

That easing by the Fed since mid-September, which pushed its benchmark overnight lending rate down 3.25 percentage points to 2 percent, eroded the dollar's yield appeal against the euro, where the European Central Bank has kept interest rates at 4 percent for nearly a year.

Analysts said while the interest rate differential and the ECB's hawkish inflation rhetoric continued to support the euro against the dollar, the outlook for the euro zone single currency was less encouraging.

HEADWIND AGAINST EURO

"We think the euro has a lot of headwinds against it in terms of making a rally back up to 1.60 (against the dollar), unless the market sees better economic fundamentals out of the euro zone," said Schlossberg.

"The overall bias at the moment seems to be pro dollar simply because the euro has run out of steam. Everybody is coming to the conclusion that the euro zone economy seems to be slowing down and the onus will be on the ECB to begin lowering rates, whereas the Fed has had most of the work behind it."

Similar views were shared by RBC Capital Markets senior currency strategist Matthew Strauss, who said a top in euro/dollar rally had been reached.

"My bias would be for a stronger U.S. dollar next week. Given increased growth concerns in Europe and despite Thursday's ECB comments, we think ultimately the downside risk will outweigh what the ECB said yesterday," Strauss said, predicting a 1.53-1.56 range for euro/dollar in the coming week.

The euro traded up around $1.5476 on Friday, still far away from a historic high above $1.60 touched on April 22, according to Reuters data.

ECB President Jean-Claude Trichet again signaled on Thursday that the central bank had no intention to cut interest rates any time soon.

GDP growth data from Germany and France due next week would probably not capture some of the weakness as most of it started showing after March, analysts said, adding that inflation figures from the euro zone would probably get scant market attention.

"Trichet suggested that the current rate level should be sufficient to bring inflation down. Add to that the recent weakening of economic indicators and it becomes clear that the ECB is slowly turning its tightening bias into an easing bias," BNP Paribas strategists wrote in a note. "We remain dollar bullish."

Movements on the U.S. stock market will largely determine the course for dollar/yen JPY= next week, analysts said, noting that some of the optimism accompanying the bailout of investment bank Bear Stearn BSC.N had fizzled out.

Direction for the U.S. stock market could come from first-quarter earnings reports from bond insurer MBIA Inc (MBI.N) and retailer Wal Mart (WMT.N). (Editing by James Dalgleish)