The dollar is closing out December near its lows for the month, but odds are good that it will rebound in January.
The greenback is up a little over 1.5 percent against a basket of currencies in 2010, but in December, the dollar index — at 79.15 Friday — was down 2.5 percent, and the dollar was down 2.8 percent against the euro.
"It's gotten pretty beaten up, as it often does during December. January is usually a pretty good month, and we're suspecting we'll see some of that activity" said Robert Sinche, global currency strategist at RBS. He said the dollar has declined in six of the last 10 Decembers, for an average loss of 1.45 percent, while it has risen in seven of the last 10 Januarys, for an average 1 percent gain.
While the dollar index is just slightly higher for the year, the dollar's moves against some currencies have been dramatic. The dollar is down more than 12 percent against the yen in 2010 and is about 6.5 percent higher versus the euro. The dollar is also down more than 13 percent against the Australian dollar and nearly 10 percent against the Swiss franc for the year.
On Friday, the euro was up nearly a half percent at 1.3346 against the dollar, for a gain of 1.7 percent for the week.
"Oversold positions in the euro, a lot of end of the year squaring and positioning, and all of that kind of feeds on itself. You had end-of-year euro demand and it created a lot of short covering and drove the euro up substantially," said Boris Schlossberg of GFT Forex.
"Next week, we'll see if this rally has legs on the euro, when everyone comes back to the market. I think all the euro skeptics closed up their books and went away on vacation and gave the euro a chance to rally," he said.
Sinche said there may be some other underlying activity in the quiet holiday week. "Part of what may be going on in this quiet environment is we might still be getting some reserve diversification out of dollars and euros and into Swiss franc and yen," he said.
Sinche expects the dollar to get a boost from improving U.S. economic data in the first half of 2011. He said the euro could touch 1.20, and dollar/yen could be in the upper 80s. Dollar/yen was at 81.21 Friday. "We then see some reversal in the second half of the year," he said.
Schlossberg said dollar/yen needs to break 85, in order to rally. "It feels like dollar/yen is really flirting with all time lows. It really feels like they want to push it and test the metal below it. 85 has been a cement ceiling for the dollar/yen and in order for us to have a true dollar/yen rally, we would need to break that level," he said.
Sinche also expects to see a turn in the yen trade. "The dollar/yen performance is extremely unusual, and we think there's potential for the yen to weaken a fair amount in the first part of next year. Our favorite trade for the first part of the year is long Canadian dollar versus yen," he said.
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