Looking ahead

“We are looking for a dollar sell-off into the second half of the year,” says Ideaglobal’s Powell, who sees the potential for the euro to strengthen toward the $1.33 area vs. the dollar by year-end. “The fear is that the Bush Administration has opted out for a weak dollar instead of trying to increase the savings rate [to help solve the trade imbalance]. Once we move beyond the end of the hiking cycle, we will likely see a sustained downtrend for the dollar.”

Most analysts stress, however, that most of the likely downward adjustment will occur primarily in the U.S. dollar vs. Asian currencies, not European currencies. Japan in particular has kept its currency artificially low in order to compete with China.

Gain Capital’s Dolan says these market factors make dollar/ yen a sale in the 112.00 to 114.00 area, with the potential for a move to the 108.00 to 105.00 region in the second half of 2006.

Additional revaluations by the Chinese will also be key factors in the dollar’s second-half performance. Moody’s Economy.com projects as much as a 5-percent yuan adjustment over the next year, which could allow USD/JPY to move toward 100.00 into 2007.