NEW YORK (MktNews) - The focus next week in FX markets is sure to shift away from a behind-the-curve ECB and on-going Japanese political wrangling, and center instead on hard U.S. economic releases and their implications for the U.S. economy and the dollar. The week brings a slew of data: CPI, Industrial Production, Capacity Utilization, International Trade, Leading Indicators and the Philadelphia Fed consumer index. Judging from the reaction from Thursday's weak economic data, analysts will be eager to jump on any signs of further economic downturn and cry for the Fed to act pre-emptively, with an inter-meeting rate cut. Trying to discern what all this means for the U.S. currency is a hefty task for most Foreign exchange traders and analysts. "Since 1973, economists have tried to find consistent links between currency performance and economic variables," said analysts at Brown Brothers Harriman in their quarterly review. "Inflation differentials, yield differentials, yield spreads, liquidity indices and balance of payment trends (to name a few) have all been shown to have meaningful relationships with foreign exchange rates." "But those relationships have not proven consistent - over time," the analysts concluded. The analysts did say, however, that most market participants did have an underlying template for currency performance; one that rewarded a country with high returns on assets with a stronger currency. The conundrum with this method is deciding whether the returns should be defined according to yield or according to capital gains. The analysts said, "In the real world of the market, the answer to that question can change as rapidly as market conditions and can even define "return" by the avoidance of loss. For now, the U.S. dollar continues to be rewarded for whatever the reason, as a safe-haven currency or as the currency of a prime investment target, and there is little on the horizon the change that. Still many analysts, when seeing the Trade weighted dollar index at a 16 year high, wonder how much longer this can continue. "Despite the emergence of the U.S. dollar as the FX market's favorite through think and thin, there are plausible circumstances during which the dollar may fall out of favor," said analysts at Citigroup in a recent report. "The main risk would be a shock to the U.S., that clearly has no possibility of being matched elsewhere. As an example, analysts point to a situation where U.S. households become sufficiently concerned about the weight of equities in their portfolio to simultaneously try and raise savings rates and sell equities. "The magnitude of the potential adjustment is well beyond what can be expected elsewhere," they said. Rather than waiting for the dollar "bubble" to pop, there is some talk the U.S. may be open to orchestrating a gradual decline in the dollar. In Thursday's Wall Street Journal, reporter David Wessel, although stating that the strong dollar has advantages, especially for a country like the U.S. that depends heavily on foreign monies, focussed on the risks of a strong dollar as well. Wessell said that a strong dollar crimped exports, which was "fine when the U.S. was booming, but ... no longer convenient." The second risk, he said, was that the dollar's rise may be blunting the impact of Fed interest rate cuts. Lower rates usually work by meaning loans cheaper, by boosting stock prices and by weakening the dollar. Wessell also pointed out, like many analysts of late, that "the dollar is looking suspiciously like the NASDAQ composite Index did a year ago-something that rises so far so fast that the only issue is when it will come down and how fast." Paul Krugman also dealt with this issue in a recent New York Times editorial. "One of these days dollar holders may do a Wylie E. Coyote: they will look down, realize that the currency has nothing to support it, and down it will plunge." The U.S. is well aware of the dangers of a downward spiraling currency, hence reported comments Thursday afternoon by U.S Treasury Secretary Paul O'Neill stating the "Bush Administration has a strong dollar policy". One U.S. portfolio manager agrees that trying to micro-manage the U.S. dollar is like walking "on a knife edge." He said that as long as the world was favoring countries with positive fiscal balances as opposed to trade balances, it was unlikely that there would be any major change in the dollar. The next major discussion about the strength of the dollar should come at the April 28th G-7 meeting in Washington D.C. David Gilmore, an economist and partner at FX analytics in Essex CT., said "With the U.S. economy floundering and the current account deficit growing at an arguably unsustainable pace, G7 officials are likely to discuss what constitutes a 'too strong dollar.'" "One can imagine the G7 adopting a communique that goes beyond the normal language; 'exchange rates among major currencies should reflect economic fundamentals', even in no specific mention of the yen, euro or dollar is included." From the traders viewpoint, there is little in the short term that would signify any pending change in sentiment out of the dollar. Fed Chairman Alan Greenspan's adroit management of the economic slowdown has most market participants, shunning Euroland and Japan - still willing to bet that the U.S. is still the place to be. Until something happens to change their mind, the dollar will still be king.