Will 2012 be the Year King Dollar Returns?

The US dollar had a bumpy year in 2011. When the dollar's value is measured against other currencies, it will end the year at a level roughly equivalent to where it started. With three days left in the year, the US dollar index will (baring a major shift) close just above 80, roughly where it was 12 months ago. Compared to gold, the dollar has done a bit worse. If one buys the theory that gold trades as an alternative currency, then the dollar has lost about 15% of its value—as gold is set to close the year gaining only $100 against the dollar. The dollar saw its greatest weakness late in the spring. This coincided with the end of the second round of quantitative easing. This correlation suggests, perhaps, the greatest single factor for what the dollar's value will be in 2012: what the Federal Reserve plans to do with its easing programs. If the Fed rolls out another quantitative easing program, the dollar could come under fire once again, and its value could plummet. How likely is a third QE program? Some of the Fed's voting members are in favor of additional QE, including Charles Evans who went so far as to dissent from recent decisions on account of lack of easing. On the other hand, many of the Fed's voting members are opposed to more easing. Perhaps the most vocal critic has been Dallas Fed's Richard Fisher, who has openly said that a third QE program would bring more risks than benefits. The Fed's chair Ben Bernanke is generally considered to be more of a dove, commonly derided by his critics and labeled "Helicopter Ben." If the Fed runs a third QE, then traders may anticipate a lower value for the US dollar. The probability of a third QE would depend upon the status of the US economy. If the economy struggles, then there might be a greater chance of a third QE. However, recent economic data suggests that the economy may be showing some improvement, and that could be bearish for the chance of more QE. The other activity that could contribute the most to the value of the US dollar in 2012 would be the status of Europe. As the Eurozone has come under pressure, the dollar has seen strength. Traders may have run to the dollar in anticipation of a repeat of 2008, wherein deflationary pressures enticed traders to flee to the relative safety of the dollar. At any rate, 2012 could be a key year for the dollar's future. With more QE, the dollar could close the year significantly lower. However, if the US is improving while the rest of the world is deteriorating, 2012 could be the year King Dollar makes his return. Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.