Dollar 2010: Rate, Not Great, Expectations

Exchanging Places

Conventional wisdom would argue all of this would make the dollar a screaming buy, yet no one is predicting anything resembling the great bull run of 1995-2001. That's when the dollar pulled out of its last major skid and went on to hit one record highs against other currencies.

Nevertheless, if the forecasts are reasonably correct, the U.S. currency will end 2010 far away from the lows of 2008, when the dollar hit a record low of about 1.60 against the euro and more than two dollars to the British pound.

Here's a snapshot of how the dollar will play out against the big three.

Euro

"The most bullish case, " says Scholossberg, is 1.30-1.35. Wells Fargo says 1.32 is possible, but a consensus could be made around the 1.35-level, which is hardly a greap leap from the current 1.42.

"Europe has more problems going on than we do," adds Pierce.

European exporters would certainly welcome a weakening single currency, although the European Central Bank is notoriously paranoid about inflation risks. It resorted to little unconventional easing during the crisis and will always err on the side of tighter monetary policy.

Pound

"The U.K. is the weakest link of the G7 economies," says Woolfork, who says a 1.53 level is likely, but a 1.40 level remains possible if both the Fed and ECB raise rates. The most likely range looks to be 1.45-1.50, based on the comments of a half dozen analysts and their forecasts.

Not only has the U.K. economy yet to return to growth, the Bank of England is thought to be considering more quantatative easing, thus making the domestic comditions, more than anything, the key driver of the pound.

There is one, wild card, however. 

"Though the  U.K. may be the most vulnerable, it is the most levered to the financial markets," notes Schlossberg. "If  the rally stalls, it creates a massive amount of pressure on the big firms, but if we see Dow 12,000, then the pound could be back to 1.70-1.75."

Yen

Here interest rate differentials holding the key.

"The Bank of Japan will be at zero rates for as far as the eye can see," says Oubina of Forex.com, whose forecast calls for the dollar/yen at 98 mid-year and 105 by the end of 2010.

Virtually every forecast has the dollar/yen rate back around 100 by year's end, a little more 20-percent from current levels.

"Japan has had a great deal of difficulty pulling out of its deflationary problems," says Wooolfork, who also expects no change in official rates during 2010.  "That will leave the yen the first choice for the carry trade," usurping the role of the dollar for much of 2009 as investors toyed with the prospect of another commodities boom.

China is also a consideration.

There it is a case of trade policy rather than exchange rates. With the Chinese currency tied to a basket of currencies, it's value against the dollar is essentially fixed, making it immune to shifting global fundmentals.

The evolution of China's economic recovery will play the determining role, analysts say. By mid-year, when its sustainability is clear, some expect the government to follow up on recent hints and return to a policy of incremental, yearly adjustments, to allow appreciation.

Until then, the dollar will make its mark against the currencies of other major trading partners, even if it is tends toweard the unremarkable.

"It may not be that fundamentals are that attractive in the U.S.," says Serebriakov. "There are very few alternatives."

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