Is the Dollar Near the Bottom?

The battered U.S. dollar may be near the bottom of its weakening cycle, but a recovery rally will take a while to materialize, because big uncertainties still hang over the U.S. economy, analysts told CNBC.com.

The greenback may sink even further versus the euro if bad news continues, and traders say the hawkish tone of the European Central Bank's President Jean-Claude Trichet is likely to accelerate its slide.

"A move towards the $1.54 or even $1.55 area is actually very much in the cards in the next few days," Ian Stannard, from BNP Paribas, told "European Closing Bell."

Michael Probst

Euromuenzen liegen am Donnerstag, 20. September 2007, in Frankfurt am Main auf Dollarnoten, nachdem der Euro ein Allzeithoch von ueber 1,40 Dollar erreicht hatte. (AP Photo/Michael Probst) --- Euro coins are seen next to Dollar bills in Frankfurt, central Germany, Thursday, Sept. 20, 2007, after the Euro reached an all time high of more than 1,40 Dollar. (AP Photo/Michael Probst)

The euro hit a new record high above $1.53 on Thursday after data showing weakness in the U.S. services sector and poor private employment figures.

Worried European leaders called on U.S. authorities to do more to halt the dollar's slide.

The European Central Bank and the Bank of England held interest rates unchanged, as they struggle to fight rising inflation caused by increasing food and energy prices.

Buying Opportunities?

Treasury Secretary Henry Paulson repeated his mantra that the fundamentals of the U.S economy are strong and that they will be reflected in the currency. And this time, analysts say, he may have a point.

"At the moment, everything looks so bad for the U.S. and so good for Europe, that we think the level is very good for buying dollars," Felix Adam, from ACT Currency Partners in Zurich, told CNBC.com.

"Personally, I think all the negative fundamentals are priced in. Even the 75-basis-points rate cut by the U.S. is priced in. We need to have more aggressive news to move it," Adam added.

The moment for the reversal is hard to predict, but it could be triggered by verbal intervention from European central banks.

"Surely, companies in Europe are not happy any more with the strong currency," Adam said.

From a technical analysis perspective, a bounce-back rally which had been anticipated before the dollar reached its new low against the single European currency has been delayed, and a comfortable level is considered to be around $1.54, Tom Hobson, technical analyst at Merrill Lynch, told "Power Lunch Europe".

Dollar Crisis?

Nevertheless, this level could be blown away if the greenback's credibility takes another hit.

"Are we in a dollar crisis? If we're in a dollar crisis, you're going to see the market move up above $1.60," Hobson said.

The U.S. currency's supremacy has been hit by a looming recession, a yawning current account gap and the fallout of the subprime crisis. But these are not likely to affect it in the long term, some analysts say.

"We know very clearly from Mr. Bernanke and the Fed that they're willing to keep the short-term interest rate trend on a downward path and that's allowing people to take a short trade in the dollar," Chris Tinker from ICAP told "Worldwide Exchange."

"I really don't think this is anything to do with long-term fundamental balance of payments considerations, I really don't think the dollar is structurally flawed," Tinker added.

Like him, many believe that once the Fed is done cutting, the greenback will bounce back quite sharply.

The dollar could rise by around 15 percent in the next year or two, said Adam, who expects it to firm to around $1.35 against the euro within that horizon, as the ECB will have to cut rates eventually.

"How long can Europe survive the decoupled interest rates? Discrepancies cannot last too long. That (situation) cannot go on for another six months," Adam said.