The dollar’s recent rebound will peter out by mid-2010, as foreign central banks diversify to other currencies and the Federal Reserve reverses stimulus slowly, according to Barclays bank.
The Fed will raise interest rates at a slower pace than the market expects, Barclays analysts say.
“We see the dollar strengthening in the first six to nine months of 2010 when the focus is on liquidity withdrawal and tightening of rates,” Steven Englander, chief U.S. currency strategist for Barclays, told Bloomberg.
“Once the market gets past this initial fear of tightening, the reality will be that the Fed isn’t going to be tightening very fast, and we’ll see dollar selling again.”
As for foreign central banks, the dollar’s share of the reserves they added to their coffers in the third quarter fell to less than 30 percent, a drop “unprecedented in a period of U.S. dollar weakness,” Barclays analysts wrote in a report.
Many central banks have said they are looking to diversify away from the dollar as their sole reserve currency.
The Dollar Index fell to a 14-month low in November, but has bounced back about 4 percent so far this month.
A move by central banks away from the dollar may not hurt the U.S. much, as the economy doesn’t receive a lot of help from the dollar’s status as the main reserve currency, according to a report by McKinsey Global Institute.
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