By Jeremy Gaunt, European Investment Correspondent
LONDON, May 15 (Reuters) - After weeks of focusing on rebounding stock markets, investors may be about to shift gears to other reflation trades, possibly including selling the dollar.
The U.S. currency hit a four-month low against a basket of major currencies this week. At the same time -- and not coincidently -- crude oil prices got close to $60 a barrel, a level not seen since last November.
Both moves can be put down to an easing of fears among investors about the future of the global economy.
They are something of a late play following a more than two-month rally in global equities and come as many stock investors are beginning to seek more confirmation of an economic rebound to keep buying.
In the case of the dollar, signs of a bottoming out of the recession weaken the currency's appeal as a safe haven where abundant liquidity has outweighed anaemic yields. It allows investors instead to focus on more fundamental issues.
"In the short to medium term, the (dollar) will likely remain weak due to weaker domestic demand and expansionary monetary dynamics in the U.S.," Goldman Sachs said in a note.
But if the dollar is to weaken further, there will be significant spillovers into other assets. Rising oil prices and a weak dollar, after all, were the hallmarks of the pre-subprime crisis boom.
Nowhere was this more evident than in emerging markets, which would be expected to gain from flows out of U.S. assets in any kind of resurgent economy.
Fund flow trackers such as EPFR Global have already identified a huge appetite among investors for emerging market stocks -- $18.6 billion fund inflows since early March as MSCI's main emerging market index has seen a 50 percent rise.
This would likely continue if the dollar begins its old descent again.
But now there is evidence of increased demand for developed market stocks as well, with both EPFR and financial services firm State Street identifying Japan as a major target.
Equities and bonds in Japan, Britain and the euro zone could be expected to benefit from a lower dollar as large investors seek to avoid U.S. weakness and being trapped in a currency on the wane.
A weaker dollar also usually boosts various dollar-denominated commodities, particularly oil. The commodity-tracking Reuters/Jefferies CRB Index has gained 8.6 percent so far this month.
FOCUS ON RALLY
With this as a background, investors are likely to pay keen attention to the dollar next week to see whether this week's low -- from which it recovered a bit on worsening economic data -- was a precursor to a larger move.
Poor data currently pushes the dollar higher while more upbeat figures tend to prompt weakening.
Data will equally be the trigger for investors focusing on the stock market rally given that MSCI's all-country world stock index was heading on Friday to its first week of losses in the past 10.
Investors lost their immediate appetite for stocks because of a burst of negative data -- primarily the sluggishness of April U.S. retail sales, but also grim first quarter growth data from the euro zone and a sombre UK economic outlook from the Bank of England.
It has left some demanding harder evidence that the world economy has bottomed out before further embracing risk.
"Historically equity markets start to price in the turn in the economic cycle about two quarters before the actual data starts to improve," Georgina Taylor, equity strategist at Legal & General Investment Management said at a briefing this week.
"However, for the market gains to be sustainable, economic growth needs to pick up as well as stabilise."
The data flow from the United States is slim next week, with the highlights likely to be some mortgage and housing figures.
Europe, however, offers up purchasing manager indicators while Japan has its first quarter growth data out. (To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Hub click on http://blogs.reuters.com/hedgehub) (Editing by Andy Bruce)