Will the US Dollar Rebound in 2012?
Just like past years, speculation about the ongoing plight of the US dollar is already dominating headlines in 2012. Though no one can predict the future, there are good reasons to be both bullish and bearish about the dollar's prospects going forward. Understanding where it might be heading is vital for any serious investor, since the dollar will certainly command enduring influence over the world economy. Take these arguments into account when you're examining how the dollar may affect you.
Positive Factors Influencing the Dollar
Since the onset of the global financial crisis in 2008, companies and nations have struggled to diversify away from perceived weakness in the dollar. As toxic debt dragged down currencies elsewhere, the dollar has recently enjoyed renewed strength. The biggest question is how much the dollar's traditional status as the number one reserve currency will help it to continue rising from the gutter in 2012.
Fortunately, dollar bulls have a great deal to look forward to. The flight from the dollar among overseas investors ground to a halt during 2011, and the trend looks set to continue in 2012. A large part of this is based on the perception of fundamental recovery occurring in the US economy. While joblessness remains high, increased manufacturing and signs of strength from well established US based companies means that the dollar is backed by a powerful basis.
Aside from perceived strengths in the US economy, a rebound for the dollar is likely thanks to serious weaknesses elsewhere. The Euro has weakened tremendously over the last two years, and that seems likely to continue throughout 2012. The various debt crises centered around countries like Greece are negatively impacting the Euro, and its damage is the dollar's gain as America regains safe haven status.
Meanwhile, on the other side of the world, slowdowns and natural disasters in China and Japan have made investors extremely cautious about holding more assets in either the Chinese Yuan or Japanese Yen. As with the Euro's threatening appearance, this only benefits the dollar.
The Dollar's Negative Prospects
While a sustained dollar rebound in 2012 looks extremely likely due to favorable conditions, there are other factors that should give investors pause. One major element in the dollar's fall over the past few years has been move by major world competitors to diversify their currency holdings. Nations like Russia, China, and Latin American countries have moved swiftly to unload dollars and snap up Euros and competing currencies.
Although current conditions have markedly slowed down this move, it seems set to resume again at some point. The dollar may continue to dominate as a strong currency in 2012 and beyond, but it's unlikely that it will continue to hold the unshakeable faith it once did. US economic rivals and allies both have serious questions about the immediate health of the US economy, and they no longer believe that putting all of their eggs in one basket by holding so many dollars is a wise strategy.
Whatever direction the wind blows, 2012 is certain to be an interesting and potentially pivotal year for the fate of the US dollar. Right now, the outlook seems good for a stronger currency, but it could change rapidly, if world economic conditions slide once again.
