The U.S., which the IMF said is at the epicenter of the crisis, is expected to contract 2.8% this year, and recovery is unlikely until 2010. However, the U.S. recession may ease before the Eurozone recession due to earlier distribution of stimulus funds and the U.S. government’s aggressive actions to restore liquidity. In comparison, the Eurozone economy is expected to contract 4.2% this year and another 0.4% next year, signaling the need for EU countries to coordinate a comprehensive, collective response to the crisis.

Others disagree, saying that the Obama administration’s efforts have helped the dollar maintain relative strength against the euro, yen, pound, and other currencies. Or, at the very least, the dollar’s proponents contend, the dollar isn’t in danger of slipping anytime soon. "I liken the dollar to an aging boxing champ in terms of being a reserve currency," said executive director of The Economic Outlook Group Bernard Baumohl.  He told the AP, "It survives because there’s no other contender out there."

That thinking is likely at the root of the dollar’s perennial status as a forex trading safe haven.  Even though there are periods when it’s seen as riskier than other currencies, traders keep coming back to the USD for safe (well, safer) online trading. However, will the USD maintain its strength when the global economy stabilizes? The author says that recovery will lead to “a new shift toward fundamentals” and a resulting focus on the large amount of U.S. government debt.

Economists have predicted that recovery could begin as early as 2010, so in the next few months, it’ll be interesting to track the USD and see if the “first in, first out” phenomenon also means that the USD is the first one to lose some of the spoils of the recession.  

Given the dreary consumer outlook, it’s not surprising that fourth-quarter GDP also fell to the weakest level in 26 years and house prices dove another 18.18% in November for the largest recorded decline. The sole bright spot, according to Lien, is the projected increase in car sales in the next six months as consumers look to capitalize on the discounts being offered to move inventory.

A UCLA Anderson Forecast report in mid-December said that although crude oil prices have dropped dramatically, the resultant fall in the absolute level of consumer prices is likely to do damage to the GDP in the next three quarters, causing it to shrink by 4.1%, 3.4%, and 0.8% respectively. The report also predicts that spike in unemployment will continue through 2009, hitting a projected 8.5% in December 2009.

It’s difficult to forecast how the passage or rejection of the revised bailout plan is likely to affect EUR/USD. The premature announcement last week of a “fundamental agreement” actually saw the euro gain against the dollar in that afternoon’s immediate forex trading. Though a failure by the government to intervene will likely damage both the dollar and the economy, the addition of hundreds of billions of dollars to the U.S. deficit could also have a deleterious long-term impact on the dollar’s position in the forex trade market. For now, it looks like a lose-lose situation for USD, notwithstanding the woeful economic news coming out of the Eurozone.

Click on image to enlarge.

As the ten-year chart above reveals, the past several months of EUR/USD price activity have been historically aberrant. Yet despite some worrying economic news and the likely impact of the bailout on the federal budget deficit, most currency trading analysts are either neutral or bullish on the greenback. FX Street’s Analysts Sentiment Index for EUR/USD shows 50% neutral, 33% bullish, and only 17% bearish. Daily FX likewise reports “effectively neutral speculative positioning” at this time.

However, Bloomberg has been reporting this week on some forex analysts who are emitting very distinct growls. On Tuesday, TD Securities economist Joshua Williamson said that U.S. deficit issues could push the dollar up to $1.95 per euro. And today, a research note from Citigroup called the current euro price dip a “buying opportunity.” The euro could move up to $1.53, according to the Citigroup report.

Looking ahead, a bearish interest rate environment for the euro suggests that the dollar may actually gain ground despite perilous conditions in the U.S. financial market. A survey released today by Bloomberg also found forex analysts to be optimistic about the dollar, which they expect to benefit from a slowdown in European economic growth.