2012: Year of Weakness or Year of Strength for USD?

US dollar banknotes and coinsThe US dollar hasn’t gone very far in any direction, be it to the upside or the downside, in 2011. The currency was falling in the first half of the year on talks about a quantitative easing and hopes for Europe, but reversed its trend in the second half. The greenback has a potential to go either way in 2012 depending of a way the European issues will be resolved and decisions the US policy makers will make.

Quantitative easing is a major downside factor for the dollar. Additional stimulus can significantly weaken the US currency, but it’s unclear when the Federal Reserve will embark on the next round of easing and will the Fed do it at all. The US economy shows signs of recovery and some market participants believe that it doesn’t require more stimulus. Yet many experts think that the recovery is still fragile and the US central bank will start printing money next year, sending the dollar tumbling down. It’s also important to remember that the Fed promised to keep interest rate exceptionally low till at least mid-2013, while the political bickering in the US government also doesn’t help the economy and the currency of the United States. All in all, fundamentals in the USA don’t look bullish for the dollar.

The bullish factor for the currency is the problems in Europe. The leaders of the European Union came up with some plans for resolving the debt crisis, but plans are just that — plans. The governments of all the countries should vote for them (and Great Britain has already declined the proposed measures, refusing to sacrifice its sovereignty for rescuing the eurozone). The measures should also be implemented and it takes time as the European governments have demonstrated inability to act quickly. The problem is that many specialists agree time isn’t something Europe can afford now. Taking that into account, Europe should be bolstering the dollar, at least in the first half of the year.

The balance of the said two factors (the bullishness from Europe and the bearishness from the USA) will define the performance of the dollar in 2012. Mitul Kotecha, currency strategist at Econometer.org, predicted the USD index to rise to 82.5 by the end of 2012. Scotia Economics forecast the dollar to rise against the euro and the yen.
2012: Year of Weakness or Year of Strength for USD? 2012: Year of Weakness or Year of Strength for USD? Reviewed by Sopheap Chhin on 4:18:00 PM Rating: 5

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