Dollar's Performance Has Some Analysts Feeling Good About Greenbacks

Is the battered U.S. dollar making a comeback? Recently, it’s beginning to look like it might be.

After a long period of decline, the recent performance of the U.S. dollar against the Euro and other major currencies has some currency traders feeling more bullish about the greenback. If they are right, that could be good news for prices of imported energy and other goods from overseas. But, if the dollar rises too far, too fast, it could put a crimp on U.S. manufacturers’ ability to sell more goods in other countries.

On Friday, the euro lost ground to the dollar, trading at $1.4787, down from $1.4869 on Thursday. The U.S. currency rose to 109.31 Japanese yen, from 108.95 yen in the previous trading session.

Kathy Lien, director of currency research for Global Forex Trading in New York says she thinks the dollar’s recent strength is for real and will continue. But, she expects the rise to be slow and steady and for the dollar to see some setbacks along the way.

“I expect the dollar to continue to gain strength but at a slower pace,” Lien said. “The dollar has gained a lot of ground in a very short period of time which means that further gains will come at a much slower pace and a correction is expected, which is what we are seeing now.”

An HSBC research report published earlier this month was even more bullish: "The USD's upward momentum is developing freight-train-like qualities, shredding those who attempt to fade the move but rewarding those on board," the note said.

The main reasons for the dollar’s strength, Lien said, have been a sharp drop in oil prices, deteriorating growth in other places around the world and the prospect of Federal Reserve interest rate hike.

The dollar reached an all time low on July 15 of $1.60 to the euro, down from a peak of 82 cents to the euro in 2000.

Lien does not expect a major reversal of the greenback unless one of three things happens: The failure of a major U.S. financial institution; a U.S. hurricane as severe as Rita in 2005, which could trigger a sharp rise in oil prices; or a sharp raise in interest rates by the European Central Bank.

Absent some big event like that, Lien says she expects the dollar to rally against all currencies. But she is not expecting a record-setting rally. A move below $1.40 against the Euro “is still far more likely than a new high,” Lien said.

On Friday, the strengthening of the U.S. dollar against other major currencies helped soften oil prices. Investors tend to put money into commodities like oil to hedge against inflation and dollar weakness. A stronger greenback usually is coupled with lower oil prices. A falling greenback encourages selling from investors who bought crude oil and other commodities as a hedge against inflation and weakness in the U.S. currency.

But the events of the week showed just how fast things can change. On Thursday, escalating tensions with Russia helped caused the value of the dollar to drop. Meanwhile the price of oil jumped more than $5 a barrel as traders moved to their money to commodities. Oil prices then frll back below $119 a barrel Friday the dollar strengthened against its rivals and Russian troops began pullback in Georgia.

"It's still speculative whether Russia will use oil as a weapon to punish the West," Victor Shum, an energy analyst with Purvin & Gertz in Singapore told the AP. "But it has certainly focused the market on that geopolitical threat."

The Associated Press contributed to this report.

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