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London: The dollar's dramatic rally last week has prompted some investors to say its seven-year slide may be over, as the focus shifts from US economic woes to the spread elsewhere of the credit crunch-inspired slowdown.
The dollar on Friday was on track for its biggest one-day rise against the euro in six years and its biggest weekly rise since late 2000.
That took the euro down almost below $1.50, over 10 cents below its record high above $1.60 struck only a month ago.
But that seems a lifetime ago. Since mid-July, oil prices have tumbled $30 from their record peak above $147 a barrel, Japan's government has said the economy may be in recession, and pessimistic euro zone sentiment indicators are turning into almost uniformly gloomy activity and growth data.
"We are in a dollar recovery trend already, albeit a choppy one," said Adam Cole, head of FX strategy at RBC Capital Markets.
"It's a combination of expectations in the US being so depressed that it doesn't take much to trigger an upside surprise... and the fact that the rest of the world is performing so poorly."
A surprise rise in pending US home sales for June according to data on Thursday sparked hopes that the US housing market may be nearing a bottom. Since the onslaught of the credit crisis, investors' focus has been on the ailing health of the US economy and financial system.
But the flu that the US economy is suffering from is now spreading, and fin-ancial markets are ramping up expectations for other governments to start easing policy.
Changing trends
"The focus is switching from concerns about a US recession to the global growth picture, and negative prints for euro zone gross domestic product will mean that the ECB tone will have to change in September," said Ian Stannard, senior currency strategist at BNP Paribas.
BNP Paribas is maintaining its forecast of $1.45 for the euro by year-end, but Stannard said there was a risk that the move will be much quicker than that. He sees the euro at $1.30 by the end of 2009.
A Reuters poll of strategists and economists last week pointed to the euro falling to $1.44 over the next 12 months.
The sharp recovery of the dollar since July is prompting investors to consider an increased focus on protection against foreign currency weakness against the dollar.
"For the past two months, I have received more phone calls from large real money managers in the US about starting to hedge their overseas exposure - in many cases for the first time in four, five years - than at any other time in my career," said Stepen Jen, chief currency economist at Morgan Stanley.
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