Slumping commodity prices and a Federal Reserve that has begun to exhibit restraint in cutting interest rates may allow the dollar's modest rally to continue next week.

Investors believe the defenseless dollar may have finally found a champion in the Fed after the U.S. central bank reduced interest rates less than expected this week and noted that it is more worried than before about inflation. That could pave the way to an eventual end to the rate reduction cycle, which would make the dollar begin to look attractive again.

"We've seen a moderate comeback in the dollar," said John Shin, currency strategist at Lehman Brothers in New York. "The Fed's decision is, to some extent, consistent with the idea that policy-makers don't want to see a dollar in free fall."

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Commodity prices might be the key to the dollar's performance next week. Oil prices fell at their sharpest rate in years this week, and if investors believe a longer-term trend toward price declines is afoot, the dollar stands to gain. Hedge funds that used dollars to buy commodities may continue to unwind those bets, parking their funds back into greenbacks.

With all of this as a backdrop, analysts are forecasting the euro could trade between $1.530-$1.560 next week, while the dollar is likely to drift between 98.00 yen and Y101.0.

Some of the dollar's swing higher this week has come as a result of its appealing status as the comeback kid of currencies, the underdog that investors want to root for following the currency's sharp losses over the past few weeks. Analysts note this type of support could erode fast if U.S. housing data out next week come in as poor as expected and remind investors why the U.S. economy and the dollar are in the dumps.

Any rebound in oil and gold prices could also push the dollar lower, as short-term investors would likely re-establish profitable bets on commodities at the greenback's expense. The dollar could find it hard to stretch its rally much further in that case.

With these downside risks to the dollar in mind, the euro even stands a chance of rising next week, though it seems unlikely that the single European currency would re-test its all-time high of $1.5905 before the end of next week.

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