NEW YORK (Reuters) - The weak U.S. dollar will likely stabilize in 2008 after sinking for five of the last six years, as the domestic economy emerges from a slump just as world growth slows.

A one-hundred dollar bill is seen in this undated file photo. The weak U.S. dollar will likely stabilize in 2008 after sinking for five of the last six years, as the domestic economy emerges from a slump just as world growth slows. REUTERS/File

Investors expect poor demand from U.S. consumers early in the year -- as falling housing prices and tight credit bring the country closer to recession -- to take a toll on other major economies in the second half, particularly Europe’s. That will weigh on their currencies and ultimately push up the dollar.

“Economies overseas are not as soft as ours but they are declining, and our economy will likely stabilize in the not too distant future,” said Brandon Thomas, who oversees $40 billion in investments for Portfolio Management Consultants in Chicago.

A stronger dollar would boost the buying power of American businesses and consumers, at a time when food and energy prices have remained uncomfortably high even as the U.S. economy slouches toward a recession.

While currency analysts are not necessarily saying the dollar’s broad decline is completely done, or that the dollar is set to rally sharply higher, they generally believe that in 2008 the dollar will recover against most major currencies.

Signs are already surfacing that economies outside the United States are beginning to falter. The Canadian dollar, the best performing major currency against the U.S. dollar in 2007, tumbled to the lowest level in a month on Friday after data showed Canada in December shed the most jobs since May 2003.

Last year, policy-makers around the world watched nervously as the dollar sank to the lowest level against the euro since the single European currency was launched in 1999. Major exporters in countries such as Japan and Brazil struggled as the falling dollar eroded their competitiveness.

In addition, policy-makers feared that a sustained rapid fall in the dollar could turn disorderly, spooking foreign investors and causing them to sell their dollar-denominated assets in droves.

The U.S. current account deficit, a broad measure of the country’s trade balance, requires about $2 billion a day in foreign investment flows; without those flows, the dollar will need to fall and interest rates will need to rise to attract capital.

And fall it has. Against a group of currencies from major U.S. trading partners, the dollar touched an all-time low in November, according to an index tracked by the Federal Reserve.

TURNING THE TABLES

Late in 2007 the dollar’s decline accelerated as markets began to reflect the need for the Federal Reserve to lower substantially its benchmark interest rate, which affects borrowing costs for consumers and companies, because of sluggish economic growth.

However, the tables are expected to turn later this year as currency markets bet that other central banks will have to deal with weakness in their own economies.

“A lot of the bad news is already priced into the dollar,” said Ray Uy, vice president of global fixed income at The Hartford. “If you look at the euro, there’s basically no easing priced into that market. However, data has been coming in on the weaker side of expectations.”

The euro has risen a staggering 66 percent against the dollar since the end of 2001, and hit an all-time high of $1.49 in November.

Since November, however, institutional investors -- which tend to make longer-term investments -- have been steady sellers of euros and buyers of dollars, suggesting a medium-term layer of support for the dollar, according to Citigroup.

If shorter-term investors, such as hedge funds, begin buying dollars in earnest, the euro could accelerate a decline, Citigroup analysts said in a report.

Bankim Chadha, head of macro foreign exchange research with Deutsche Bank, one of the biggest participants in the currency market, also believes the dollar will stabilize later this year when the housing sector stops subtracting a full percentage point from U.S growth.

He forecast that the euro would sink to $1.37 by the end of 2008 from $1.48, where it currently is trading. Yet, Chadha also acknowledged that a U.S. recession, while he did not expect one, would knock the dollar a lot lower before rebounding.

After following a trend of weakness since the beginning of 2002, a recession could make the dollar the cheapest it has ever been against the currencies of major U.S. trading partners, according to a valuation measure used by Deutsche Bank.

“We’ve never done that before,” Chadha said.