Can the Dollar Bounce Back?

As the base currency of the forex market and the reserve currency of the world, any kind of struggle that the U.S. Dollar experiences will have repercussions for all major financial markets. For the investor with dollar denominated assets, the question is whether to shift out. If you are holding dollars, should it be time to switch to another currency?

There is no easy answer to this question because the situation is complex. While some forex analysts may say the dollar will continue to fall, others believe that it will bounce back eventually. Regardless, the best way to gauge the future plight of the greenback is to check the U.S. economy, which dictates the performance of the Dollar in the forex market.

At the top of the list of economic stats and issues is the continuing housing crisis. The figures from the Labor department stated that house sales fell 20% in November 2007 as compared with the previous year's figure. Overall it was the lowest it had been since 1999. According to industry sources the number of unsold homes is around 4.5 million units,

This data, together with a host of other figures, dampened Wall Street, and forex analysts estimate that the Dow Jones registered only a 6.4% gain for 2007. Another key figure is that unemployment rose by 5% in December, the highest in over six years. Job growth was reported at 18,000, way below the expected figure of 70,000.

While the job losses in house related businesses were expected (over 35,000), what worries forex analysts and U.S. Dollar watchers is that other areas seem to be getting affected. The auto industry reported a job cut of over 6,000 and the retail industry over 25,000 due to the weak holiday sales. This is seen by most industry observers as part of a weakening U.S. economy.

The main concern right now is that if this continues, consumers might cut back on spending, and this could be followed by a reduction in factory output, leading to job cuts and eventually a recession. What this means for the trader is that the Fed will continue to reduce the rates and thus lower the value of the greenback some more in forex.

Certainly things look bleak for Dollar holders, but some say it is too premature to switch portfolios to the Euro or Yen. For some forex analysts, if a recession does take place, the demand for oil, now hovering at the $100 levels, will go down, and also its price.

This will in turn stimulate the U.S. economy and revitalize the greenback. Although no timetable can be set, some observers believe it may be a good time to buy or hold on to Dollars as they will eventually regain lost ground.

All of these are projections of course, and a lot of things can happen; the U.S. can enter into a long recession, or an event in the Middle East might cause an oil price surge. It is also possible that the Dollar will recover. Some analysts are predicting that the economy will slow down, but only for the first quarter of 2008.

Right now, the short (and perhaps medium) term outlook is quite bleak, so if you want to profit in the forex look for other currencies. But if you are looking at the long term, keep an eye out because the Dollar might yet stage a comeback.