Risk sentiment dominated the markets last week; and it will no doubt do so again next week. This is a promising trend for Japanese yen traders who are looking for volatility – and nail-biting for those that await a lasting trend. Among the major economic drivers for next week, half are scheduled and the other half are potential.

The market will have to make a critical decision on the primary fundamental function of the US dollar within the next few weeks; and the ultimate verdict could finally put the world’s reserve currency back on pace.  Bringing the greenback one giant step closer to a definable trend in the week ahead are two key drivers: risk sentiment and economic activity.

Sentiment and fear will no doubt hold the greatest level of influence the Japanese yen's future.

In the forthcoming week, the euro may once again find a dominant, fundamental trend from its mature and wide range against the benchmark US dollar.

Heading into 2009, the factors that made the dollar appealing last year seem to be fading, replaced by sound reasons to believe the dollar may once again find itself on the chopping block.

The US dollar has spent the past week consolidating within thin ranges, as low volumes did little to spark directional trade. This left the greenback down 1 percent against the euro and up roughly 1.5 percent versus the British pound and Japanese yen by Friday’s close.

The euro enjoyed a strong rally this past week, but was this a sign of optimism in European growth and interest rates or a mere retracement borne from the need to quickly diversify away from the US dollar?

The Japanese yen saw a massive surge across the board through Friday’s Asian session, but this momentous move would ultimately be unwound before volatility receded for the weekend. Now traders are left to wonder whether this was the sign of a bigger fundamental shift behind the carry strategy’s perennial funding currency or a errant technical move that has altered the fundamental future of the key currency safe haven.

It’s difficult to assign the US dollar a bullish fundamental bias considering the acceleration of the economy’s recession and the fact that American markets are the epicenter to a global financial crisis, but regular economics do not apply in times like these.  In normal market conditions, expected returns hang in a delicate balance with a general tolerance for risk.

With liquidity topped off after last week’s extended US holiday, market participants are once again trying to establish the primary, fundamental driver for the dollar going forward.  Through the immediate future, interest rates will continue to influence the greenback, but its impact has certainly changed in the span of a year.