LONDON The prospect of low U.S. interest rates for some time is likely to trigger more dollar selling next week, with upcoming central bank meetings in Europe serving as a reminder of greater chances of rate rises elsewhere.
The Federal Reserve's promise this week of continued ultra-loose monetary policy in the world's largest economy has taken U.S. and global shares to new peaks -- the Nasdaq index
hit 10-year highs and the MSCI index of world stocks hit its highest in nearly three years.
At the Fed's first post-meeting press conference, chairman Ben Bernanke also soothed stock markets by saying inflation was a transitory problem.
The upshot is that the dollar is looking like the carry trade of choice -- as a low-yielding borrowing tool to buy higher-yielding currencies -- especially after the European Central Bank raised rates in April.
The dollar is hitting three-year lows against an index of currencies, as well as its lowest since the Bretton Woods system collapsed in 1973 against the inflation-adjusted version of the Fed's broad trade-weighted index. The weak dollar and persistent inflation concerns have propelled gold and silver to record highs.
The ECB holds its policy meeting on Thursday, with analysts seeing a 90 percent probability of no change to current euro zone rates of 1.25 percent. But they see a 45 percent probability of a rate hike by end-June.
"Markets are positioned for further interest rate hikes from the ECB," said Sarah Hewin, head of research for Europe at Standard Chartered.
"But if we have an indication next week that the ECB is likely to raise rates in June, that's sooner than the market is anticipating and would be euro-supportive and dollar-negative."
The dollar's fall is also an indication of structural worries about the U.S. economy, its deficits, its aging population and the vulnerabilities inherent in a far-from-secure reserve currency status.
"The euro is going up because it is the prime reserve alternative to the dollar," said Neil Mellor, currency strategist at Bank of New York Mellon.
The euro has spurted nearly 2 percent since Monday's close, and analysts expect it to pack on another two cents in the next week or two, to hit $1.50 for the first time since Dec 2009.
The U.S. economy is still showing some signs of life, however, with employment data on Friday seen giving a further sturdy boost to non-farm payrolls in April, following a 216,000 increase in March.
If U.S. and European first-quarter earnings data next week continue the current trend, they will also support a bright equity outlook.
Of 248 S&P 500 companies that have reported first quarter earnings, 78 percent beat or met expectations, and 22 percent came in below, according to data from Thomson Reuters StarMine.
For the 81 STOXX Europe 600 companies which reported so far, a slightly less stellar 58 percent beat or met expectations.
Major European companies to report first quarter earnings next week include Siemens and France Telecom and banks RBS and Commerzbank.
In the U.S., earnings are due from Kellogg, Time Warner and AIG.
In addition to the ECB's post-meeting press conference, which takes place in Helsinki, president Jean-Claude Trichet speaks again at a conference in Finland, alongside his likely successor, Bank of Italy Governor Mario Draghi, and other central bank governors.
The Bank of England also meets next week, with an 80 percent probability seen of no change in rates of 0.50 percent. But another quarter point is expected on rates by the end of the third quarter.
Britons go to the polls on Thursday in a referendum on the way legislators are elected, along with local elections in some areas.
The vote lacks headline appeal but is likely to show up cracks in the coalition government, which is attempting to push through tough austerity measures.
"We fear that the UK will experience a long period with poor growth which can result in a larger rise in the debt burden than currently anticipated," Danske analysts said in a note.
"There is a good chance that rates will be kept at record lows for a long time. The weak underlying growth and the tough fiscal austerity measures crowd out monetary normalization."
In bond markets, Spain auctions five-year debt on Thursday as investors continue to fret about the euro zone periphery, in particular the possibility of Greek debt restructuring.
The worries have punched out peripheral debt spreads against core German debt. But for now, the euro is proving resilient to the debt woes.