After plunging to another lifetime low against the euro, the U.S. dollar may finally be due for a bounce.

The euro hit a record high near $1.57 and the dollar slumped to a 12-1/2 year trough below 100 yen on Friday after J.P. Morgan Chase and the New York Federal Reserve agreed to pump emergency funds into investment bank Bear Stearns.

But analysts are now starting to think that the credit turmoil that has rattled Wall Street and pushed the U.S. economy toward recession is set to hit other economies too.

That should prompt global central banks to follow the Federal Reserve's lead and begin cutting interest rates, which would dim their currencies' appeal against the dollar.

I think pressure on the dollar is going to abate, said David Greenwald, chief operating officer, at TG Capital, a global macro hedge fund in Newport Beach, California, which invests in currencies.

The dollar will benefit when the world realizes that while this may be a U.S. mortgage payor problem, but that paper is held globally. There has to be contagion and once this happens, flows are going back to the dollar, Greenwald said.

For now, though, the U.S. dollar seems to be the last place investors want to be. It even fell below parity against the Swiss franc for the first time ever on Friday, suggesting that even investors looking for a safe haven prefer the Swiss currency over the greenback.

The dollar has lost about 7.0 percent of its value against the euro since the beginning of the year and more than 13 percent in the last 12 months. Against the yen, it's about 10 percent weaker in 2008.

Slowing U.S. economic growth and worsening problems for financial institutions, stemming from failed investments in the assets related to the U.S. housing market, have soured sentiment on the dollar.

DOLLAR BEARS REMAIN

Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington, thinks things could get worse, particularly if the Federal Reserve and U.S. Treasury are forced to do more to prevent the U.S. financial system from collapsing.

That may entail even more aggressive interest rate cuts and more liquidity injections from the Fed and other central banks.

The dollar is going to bear the brunt of that, he said. I think we very possibly could see the euro at $1.60.

Still, signs are emerging that economies outside the United States are beginning to falter, affecting their currencies as well. The Bank of Canada early this month has cut interest rates by half a percentage point, its biggest easing since late 2001.

The Bank of Canada decision came a day after data showed the Canadian economy grew by less than expected in the fourth quarter.

Economists also expect the Bank of England to cut rates 5.25 percent by the middle of the year to boost an economy buffeted by the global credit crunch.

So far, the European Central Bank has held its ground holding its benchmark interest rate at 4.0 percent. ECB President Jean-Claude Trichet had stressed the ECB's commitment to maintaining price stability and has given no indication whether slowing economic growth, tight lending conditions, or broad market volatility will prompt a rate cut soon.

The dollar's best hope will less likely come from good news on the U.S. side, but from bad news elsewhere: from contagion and recoupling. In the meantime, contagion is still lagging, said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

The Swiss National bank, while holding interest rates unchanged on Thursday, inched closer to a rate cut, when it said that the global credit crisis has worsened the economic outlook.

When economies recouple, other central banks will be cutting rates with the Fed. Once you can draw in the ECB and the SNB (Swiss National Bank) to be cutting rates, then that would be a helpful environment for the dollar, he added.

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