Has a new era dawned for Greenback?

The US dollar has been a currency in decline for decades. Yet signs of strength in the US economy, a stock market boom and the prospect of the US becoming a net oil exporter in the next few years all suggest the tide may be turning for the world's most widely-used currency.

"I do believe we've seen a favorable shift in sentiment towards the US dollar," said Ed Ponsi, managing director at Barchetta Capital Management in New York. "Ten years ago it was widely assumed that the euro would eventually supplant the dollar as the world`s reserve currency, but that is no longer the case."
(Read More: Better US Economy Throws Wrench in Currency Markets ) The dollar index, a measure of the dollar's value against currencies of the United States' major trading partners, last week hit its highest level in almost three years at 84.50. It held near that peak on Wednesday, a day after strong US data lifted the blue-chip Dow Jones Industrial Average to a record high.
The downtrend in the dollar has lasted almost 30 years because of weaker economic growth and more recently by money printing to fund asset purchases by the Federal Reserve.
The dollar index is currently at around 84.25 - well below a peak above 157 hit in 1985 and where it traded just under 120 before the tech-bubble burst in 2001. Still it has been creeping higher this year and the trend is expected to pick up in coming months.
Signs of change
Strategists say the fact that the dollar is rising in tandem with the SandP 500 stock index is a bullish sign for the currency as it suggests foreign investors are moving into US equities and snapping up the greenback to do so.
Foreign holdings of US stocks and bonds have more than doubled since 2005, data released from the US Treasury earlier this month showed. Of the USD 13.26 trillion total worth of stocks and bonds held by foreigners, USD 4.2 billion was held in stocks in 2012, a 10.6 percent increase from 2011.
(Read More: Foreign Holdings of US Securities Have Exploded)
"The fundamental change this year is that the dollar is no longer a risk-on, risk-off currency," George Saravelos, European head of currency strategy at Deutsche Bank, told CNBC Europe's "Squawk Box" on Tuesday.
"The SandP 500 is up hugely this year and yet the dollar is stronger, which is unusual from previous years. This is one of the key reasons why we`re bullish on the dollar - the breakdown in the [negative] correlation reflects underlying changes in portfolio flows moving much more into the US," he said. (Read More: Dollar Rising With Equities Is Bullish Sign for Stocks ) Expectations that the US will turn from a net importer of oil to net exporter over the next few years given the production of US shale oil also suggests a stronger outlook for the dollar, analysts said.
And while the US economy may not be running at full steam , the US is in better shape than recession-hit Europe or Japan, which is just pulling itself out of the doldrums and that's another spur for dollar bulls, who have started to anticipate an unwinding of Fed's monetary stimulus.
"The dollar is still historically at low levels, but we think the dollar trade is positive and will turn higher," said Patrick Bennett, currency strategist at Canadian bank CIBC.
HSBC last week revised its dollar forecasts. For instance it expects the euro to fall to USD 1.22 early next year from a previous estimate of USD 1.37. The euro stood at around USD 1.2854 on Wednesday.
"Our dollar bullishness does not rely on an early tapering [of quantitative easing], but if the Fed acted sooner than we expect then the dollar would capitalize," HSBC analysts said in a note. "The dollar has already risen but this is just the beginning."
- By CNBC.Com`s Dhara Ranasinghe; follow her on Twitter @DharaCNBC
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