Dollar-Rebound May Be Imminent, Should U.S. Slowdown Hit Global Economy

Washington, DC (AHN) - According to analysts, the dollar may be set for a rebound after having hit record lows against the Euro and other major currencies recently.

The decline of the greenback has been unrelenting this year with the U.S. currency down 5 percent against the British pound, 7 percent versus the yen, a whopping 10 percent against the single currency, and 14 percent versus the Canadian dollar.

Maurice Obstfeld of the University of California at Berkley and Kenneth Rogoff of Harvard University tabulated in 2005, that the dollar would need to decline as much as 30 percent against the Federal Reserve's trade-weighted basket of currencies to balance the U.S. trade deficit, now tagged at more than 6 percent of the nation's economic output.

According to that theory, the dollar would have to drop another 20 percent, before it hits rock bottom. But some analysts say currency markets are difficult to predict, and there is an argument to be made that the dollar could bottom-out in the near future.

For instance, comparing what a dollar buys in the U.S. (at U.S. prices) and overseas (at foreign prices) leads to a conclusion that the dollar is undervalued.

"You can't go to Europe and not think it's really expensive, and a European can't come to the U.S. and not think it's for sale," says Brad Setser, an economist at the Council on Foreign Relations, reports the Wall Street Journal.

Despite the economic slowdown in the U.S., the dollar could pick up on a rebound if other global economies slow as well, say experts.

Robert Sinche, head of global foreign-exchange strategy at Bank of America told the Journal, "To say that the rest of the world is immune to the U.S. slowdown is premature" noting that, the Euro's strength against the dollar is already hurting European businesses.

An example of that is Airbus. Its CEO, Tom Enders has referred to the decline of the dollar as "life threatening," amid plans by the aviation firm to transfer its production units to the U.S.

In the near term, analysts say that U.S. financial firms hit by the subprime mortgage crisis may need to sell foreign currency-denominated assets in exchange for the dollar in order to maintain their balance sheets before the end of the year. That would boost the U.S. currency.

The dollar dropped against the Euro to $1.4670, while lowering against the yen to 110.58 by 6:25 am in London.