Is dollar destined to dive in 2010?

However, the Bloomberg survey also indicated that the top, or most accurate forecasters in the survey predict that the dollar will continue to weaken even as the U.S. Federal Reserve starts to increase short-term interest rates, which Fed officials have said is an extended period away.

The dollar weakened about 1 cent on Monday at mid-day to $1.4982 and $1.6609 versus the euro and British pound, respectively. It rose about one-quarter yen to 89.15 versus Japan's yen.

So far in 2009, the dollar has weakened about 8% versus the euro, about 7.5% versus the pound, and roughly 4% versus the yen. Even so, the dollar is basically flat versus the euro since the financial crisis' acute stage in the fall 2008, while it's risen about 18% versus the pound, and plunged about 18% versus the yen.

Currency Analysis: A weakening dollar would seem to go hand-in-hand with back-to-back, trillion-dollar U.S. budget deficits. However, currency values are not determined solely by fiscal policy. An economy's strength and interest rates also play a large role, as well.

Moreover, if the U.S. economic recovery gains momentum in 2010, that would certainly support the buck. Add a Fed rate increase in the second half of 2010, and Congressional action to cut the deficit (including health care reform), and a dollar-decline hardly becomes a slam-dunk for 2010.

Also, investors assuming or counting on a declining dollar in early 2010 should also keep this in mind: if the U.S. economy shows strength in Q4, currency traders will begin to push the dollar up almost immediately. In other words, there is a scenario in which the dollar does not fall at all in 2010, but rises throughout.