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Dollar's Long Rally Likely to Stall in 2009

Recession, low interest rates will catch up with buoyant greenback

By Jason Farago, Newser Staff

Posted Dec 8, 2008 5:28 AM CST

(Newser) – The once moribund dollar has soared 20% against foreign currencies since July, one of the few bright spots in a grim financial landscape. The dollar traded against the euro at $1.28 this morning, down from a high of over $1.60 this summer. But the dollar's rally is expected to stall in 2009, as low interest rates and the pain of a recession catch up with the greenback.

Despite America's economic woes, risk-averse investors flocked to the dollar while dumping smaller, more volatile currencies. But foreign exchange analysts warn that the dollar's advance has been "artificial," and that the buck may face a rapid sell-off in the first quarter of 2009 before stabilizing. "Foundations for the dollar's recent rally have not been solid," said one strategist. "We are bound for a correction."

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The dollar has made substantial gains against foreign currencies in recent months, but the advances are expected to end soon. (©thisisbossi)

The dollar has made substantial gains against the euro in recent months, but the advances are expected to end soon. (©ThunderChild tm)

The dollar has made substantial gains against foreign currencies in recent months, but the advances are expected to end soon. (©Hammer51012)

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The dollar was at the receiving end of leverage flows and also concerns about the eurozone's ability to navigate its first systemic crisis. But the US currency is no longer very cheap. - Daniel Katzive, foreign exchange
director, Credit Suisse

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Dollar's Long Rally Likely to Stall in 2009