FX OUTLOOK-Sentiment remains tilted toward dollar

By Steven C. Johnson

NEW YORK, May 16 (Reuters) - With recent market sentiment in its favor, the dollar looks well-positioned to build on recent gains in the week ahead, particularly if Federal Reserve officials continue to dwell on the risk of higher inflation.

After sinking to an all-time low against the euro late last month, the dollar has rallied against most major currencies in May, and better-than-expected retail sales and housing reports helped counter softer data on manufacturing and consumer sentiment.

"We have been seeing very steady net buying of the dollar across the board for the past several weeks," said Samarjit Shankar, director of global FX strategy at The Bank of New York Mellon in Boston.

"That, to us, is a very telling indicator that the market has turned, and people will be looking for any fresh catalyst to buy the greenback," he said.

Also helping the dollar has been a chorus of Fed officials who have seemed increasingly concerned that rising energy costs would put upward pressure on inflation.

That has suggested to markets that the U.S. central bank may indeed be through with interest rate cuts -- and just when softer euro zone data has suggested that the Eu ropean Central Bank may have all its rate-cutting ahead of it.Fed governors Donald Kohn, Kevin Warsh and and Randall Kroszner are all slated to give speeches next week and currency market participants will keep a close watch.

Analysts said the shift in the relative interest rate outlook should continue to favor the dollar over the euro.

"If I were running a trading desk, now would be the time I'd authorize traders to go long the dollar overnight instead of short," said John Browne, senior market advisor at Euro Pacific Capital in Darien, Connecticut.