Bearish fundamentals

Several economists warned that forex market focus could shift back to the bearish fundamental and structural situation seen in the U.S., which could weigh on the dollar.

“It is important for investors not to get too swayed by short-term trends in the currency markets,” Harris says. “There still is a fundamental imbalance in global economic affairs.”

He points to the current account deficit, which was likely to hit $700 or $800 billion on a yearly basis in 2006.

“Investors will start to question the huge borrowing requirements the U.S. has,” Harris says. He calls this a “chronic risk” to the currency.

Kasriel agrees that forex traders could shift their focus back to this larger issue in 2006.

“Global investors are going to start to wonder just how the U.S. intends to pay interest and dividends on all this capital it is importing,” he says.