SPECIAL REPORT .. Dollar faces correction, but could head up in 2009 .. Many currency analysts expect rocky path, but some see winning finish By Lisa Twaronite, MarketWatch Dec. 18, 2008
SAN FRANCISCO (MarketWatch) -- Currency market investors should hang on for some big adjustments in the first half of 2009 as the greenback corrects from its recent safe-haven surge, but many analysts expect the dollar to gradually get its legs back later in the year.
In 2008, the dollar did what most analysts expected it to do, but not for the reasons most had expected.
The U.S. economic recovery that many had predicted failed to materialize. Instead, the credit crunch morphed into a crisis, the slowdown turned into a full-blown recession, and U.S. interest rates went further down instead of up.
But the dollar still came roaring back to life in the second half, buoyed not by better U.S. fundamentals but by a mostly unexpected rush to safety.
COMMODITIES
Waiting for the thaw
Global stimulus efforts and production cuts could help revive commodities by the second half of 2009, sector forecasters say. But it's going to be a long, cold winter.
Nine links inside • Global outlook for 2009: Just hoping • 2009: China looks to domestic consumers • Emerging markets: The best and the worst • Corporate bonds ready to rally? • Dollar faces correction, then recovery • 2009: Recession clouds market recovery • 2008: A year for the record books • Best and worst stocks of 2008 • See the full special report http://www.marketwatch.com/NewsCommentary/SpecialReports/YearEnd
And now it's pay-back time.
"The consequences of the dollar's strength in the second half of 2008 will be seen throughout the first half of 2009. The prior strength of the dollar will eat into the profit margins of many U.S. companies that are doing business abroad," said Kathy Lien, director of currency research at GFT in New York.
The correction has begun, though the greenback remains well off its record nadir against the euro hit in July, and is unlikely to retest it. Against the yen -- which proved to be ultimate safe-haven beneficiary -- the dollar is now probing lows not seen for more than a decade, but many say the Japanese unit could hit a floor as Japan's own economic picture continues to darken.
To be sure, the dollar's 2009 trajectory depends a lot on what the U.S. and global economies do, and when they do it. The U.S. recovery could begin midyear, or the clouds could linger until the fourth quarter or even longer. But sooner or later, some analysts predict the dollar is likely to resume its place in the winners' column over the course of next year.
"I don't think the dollar will have a big turn-around based on the U.S. economy getting back to health, because the U.S. is going to be a barometer for global health," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Conn.
"It's 'heads you win for the dollar, tails, every other currency loses,'" he said. "What's been a dollar-positive on the way down, in terms of safe-haven status, will probably give way to the appeal of investing in a leading global economy."
How bad it was
Was it only about a year ago that European supermodels were refusing to be paid in U.S. currency? For much of 2008, those dollar naysayers looked pretty smart.
The euro rose as high as $1.6036 in July -- its loftiest level since the common currency began trading in January 1999. But it subsequently gave back that ground: Although it surged against the dollar this week, it is still down more than 3% for the year against the U.S. unit.
The dollar's ascent in the second half of this year was by no means a vote of confidence in U.S. economic fundamentals, but rather an indication of how bad it was everywhere else. The 15-member euro-zone economy is in its first official recession, and the Japanese economy is now contracting after six years of growth.
Moreover, as the credit crisis raged and interbank markets grew more illiquid, the need to support domestic balance sheets around the world adding to demand for the dollar as a funding currency.
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