A Dollar Rebound? Assume a Best-Case Scenario

Which Way To Go?

Jones says it is possible for the currency to appreciate 15 percent to 20 percent in the next year or so as “people look at the dollar in a more positive way.”

Jones expects a scenario where  “interest rate fundamentals turn.” Growth will slow drastically in Europe and the European Central Bank will cut rates as the United States emerges from its recession and starts raising rates.

But Maria Fiorini Ramirez, president of the economic consulting firm MFR, doesn’t subscribe to that.

She expects the dollar to be a “little lower’ against the euro in a year’s time, adding that it has “more of a chance appreciating against the yen.”

She says the Fed is “stuck between a rock and a hard place” on interest rates and inflation and, by association, the dollar.

In recent decades, the dollar’s demise has been greatly exaggerated. The last dollar slump came in 1994-1995. In early 1995, the US currency fell below 80 yen amid cries about the hazards of the twin deficits and a sea of dollars. Shortly thereafter, the dollar began a robust rebound for years, setting a record high against the newly arrived euro in 2000 and 2001.

What’s different today? In a word, the Internet, says Schlossberg. The emergence the Internet in the US brought enormous productivity gains and capital flows in the 1990s and up to the tech bust. And that attracted investment which, in turn, pumped up the dollar.

Today, the Internet is old hat. And today, there's no big new thing.

Ramirez and others add that the dollar is undergoing a fundamental reevaluation.

“I think the desire by big holders to diversify out of dollars is still there,” says Ramirez, citing a force that began in 2001. “Commodity exporting countries that have a lot of reserves are shifting those assets.”

The Federal Reserve headquarters in Washington, DC.

Ramirez and Schlossberg cite oil producing Persian Gulf states as prime examples. China, Japan and Korea are also factors in this form of capital flow.

As the theory goes, the U.S. is in the early stages of losing its status as the world’s reserve currency, a process that some say started in 2001 after the 9/11 attacks.

Silber and others are skeptical, but admit that unlike the 1990s and the 1970s – when the Fed let inflation get out of control and the dollar suffered greatly – there is an alternative in the marketplace now in the form of the euro.

But even that doesn’t preclude a dollar rebound, never mind rally -- not that Silber is predicting one.

"The demise of the dollar as the international currency doesn't happen overnight," says Silber.

© 2008 CNBC.com

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