Second-half fade?

However, some analysts warn that while the first half could see dollar bullishness fueled by strengthening interest-rate differentials, the buck could fade in the second half of the year. Structural factors, such as the trade deficit and the current account deficit, could re-emerge as critical factors dominating currency market flows.

“Without any improvement in the trade deficit, we think the market will finally take a good hard look at the unsustainable external factors,” Buskas says. She points to the new record trade deficit of $725.8 billion posted in 2005. That paints a dour picture for those currency investors examining the larger picture, Buskas warns.

“[The currency markets will see a] rotation of appetite away from the dollar into other high-yielding currencies with a better fundamental picture,” Buskas predicts. “It’s a case of a slow reversal of drivers. By the end of 2006, we will see some structural matters come to the fore, which will lead the dollar lower.”