2008 - the return of the dollar?

By Ben Morris
Business reporter, BBC News

A stronger dollar will be a relief for firms that export to the US

It caused trade friction with China, was rejected by Indian tourist attractions and a US rapper, but analysts think that after a turbulent 2007, the US dollar could be in for a calmer year.

It became clear last year to many Americans that their currency was not as valuable as they once thought. Those on holiday in Europe would have found their trip expensive.

Indian tourist authorities said they would no longer accept dollars for entrance to the Taj Mahal. And at home, rapper Jay-Z waved a wad of euros in a music video.

The dollar's slide began last summer when the scale of the crisis in US mortgage industry started to become clear.

Record lows were hit against the euro through the autumn as warnings about a US recession became more frequent and the US Federal Reserve started to cut interest rates. By late November it had fallen to a low of $1.4858 per euro.

Click to see the euro's rise against the dollar in 2007

Despite regaining some ground in December, the dollar still fell 8% against the euro for the year, leaving many wondering whether the greenback could maintain its position as the world's most important currency.

Worst over?

But now many in the currency markets think the worst might be over.

"A lot of bad news is already priced into the dollar. It's elsewhere that the shocks could come from, perhaps from the European Central Bank, or the Bank of England," says David Bloom, chief currency strategist at HSBC in London.

The euro is heavily overvalued and we'll find the euro zone economies turning down this year Jeremy Stretch, Rabobank

Mr Bloom expects traders to recognise that the dollar is now relatively cheap. That would prompt a rebound and he thinks the US currency could end the year at $1.35 per euro.

Rabobank's senior currency strategist, Jeremy Stretch, also thinks that after some early punishment, the US currency could recover by the end of the year.

Over the next few months he says it could go as low as $1.50 per euro as traders fret about the US sliding into recession. But by the year end he is predicting the dollar back to around $1.30.

"The euro is heavily overvalued and we'll find the euro zone economies turning down this year," Mr Stretch says.

Corporate relief

A reversal of fortune for the dollar will be a relief for companies that export to the United States.

Rapper Jay-Z shunned the dollar in a recent video

Louis Gallois, the head of Airbus parent company EADS, describes the dollar as his company's main problem and he is now considering moving production away from Europe.

British engineering group Rolls-Royce has experienced similar problems.

Like Airbus, a large amount of its sales are in dollars, but its manufacturing base is in the UK. So the weak dollar hit profits and was partly behind a plan to close a UK-based plant.

Battle with China

But the biggest political trouble last year was caused not by the dollar's weakness, but by its strength, particularly against the Chinese yuan or renminbi.

US politicians accused China of deliberately keeping its currency weak, which they said gives Chinese manufacturers an unfair advantage and causes job losses in the US.

Repeated trips by US officials to Beijing and loud criticism from Congress only won a modest appreciation in the Chinese currency.

Candidates in the race to become Presidential nominees have picked up on the sense of foul play.

Several, including Democrat John Edwards and Republican Mike Huckabee, would like to more action to protect US jobs from overseas competition.

Sterling under pressure

While the battle continues over the Chinese currency, US tourists visiting London might get some relief in 2008.

The chief currency strategist at Bank of New York Mellon, Simon Derrick, says the situation is looking ominous for the pound.

To him the UK trade deficit looks alarming and he calculates that, for the size of the population, it's actually worse than America's.

Add to that a weakening housing market and further cuts in interest rates and sterling could in for a sharp fall this year.

So, perhaps 2008 will be the year of soggy sterling and the return of the dollar. We may even see Jay-Z proudly waving the greenback.

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