Is the dollar facing collapse?

The dollar may have staged a marginal recovery last week, but the outlook for the greenback remains bleak. The key currency influences all point to a lower dollar - but could an all-out collapse be on the cards?

Dollar bills are looking rather scrunched up,' says John Authers in the FT. The greenback posted a marginal recovery last week after hitting an all-time low of almost $1.37 against the euro a fortnight ago, and it also recently touched a 26-year low of more than $2 to the pound. On a trade-weighted basis - against a basket of its major trading partners' currencies - it has fallen by around 27% over the past five years.

There are several influences on currencies and, as Edward Hadas points out on Breakingviews.com, all of them are pointing to a lower dollar'. A key factor over the short to medium term is interest rates; high rates boost the yield on a currency's assets. With US growth disappointing - the IMF expects it to marginally underperform Europe in 2007 - many analysts are pencilling in US rate cuts later this year; in Europe and the UK, they are set to rise. Stronger growth outside the US means there's a depreciation bias in the dollar', Kenneth Rogoff of Harvard University told Bloomberg.com. Meanwhile, US inflation is uncomfortably high, which undermines the dollar's appeal as a store of value, notes Hadas.

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