FX OUTLOOK-Stocks to set tone for dollar next week

By Lucia Mutikani

NEW YORK, April 18 (Reuters) - Signs of renewed confidence in the U.S. financial system could support the dollar next week, provided March's housing reports do not show sharp falls and revive the chances of a steep interest rate cut this month.

Quarterly results from the largest U.S. bank, Citigroup Inc. (C.N: Quote, Profile, Research), on Friday, although worse-than-expected, gave investors hope the credit crisis was nearing an end, sparking broad equities and dollar rallies.

The credit squeeze was triggered by the housing slump in the United States, where financial institutions advanced loans to homeowners who were ill-equipped to repay them.

"Probably for the first half of the week, the dollar will continue to take its cue from the equity market performance. If we see renewed confidence in the U.S. financial system, the dollar could continue to benefit," said Omer Esiner, forex analyst at Ruesch International in Washington.

But analysts cautioned that gains for the dollar on an improved risk appetite and rising stocks could be erased if U.S. existing and new home sales data for March, due in the coming week, showed signs of deeper troubles in the housing sector.

Housing starts data this week suggested that the pace of the sector's decline was intensifying, contributing to the euro's push to record highs above $1.59 to the dollar.

A recovery in the housing market is seen as a necessary precondition for the broader economy to regain its strength.

"More disappointing data in the U.S. would probably erase some of the dollar's recent gains and likely fuel talk of a more aggressive 50-basis-point interest rate cut from the Federal Reserve at the end of the month," said Esiner.