The rise of the dollar could continue for the first part of 2012. Nonetheless, the longer-term picture is bearish for the greenback.

U.S.: Housing Prices Bottoming?

The positive momentum is unfolding in the U.S and could expand into the first part of 2012. However, it would be challenging for the U.S. to hold the fort alone. Consumer and business confidence have improved, but still remain below pre-recessionary levels. Employment grew in most of the sectors, excluding finance, construction, real estate and government. Since February, businesses employed more than 3,000,000 people, while the deleveraging sectors lost about 600,000 jobs. In the past 12 months, household wealth, which was behind the recovery of the past two years, has deteriorated. Wages have been sinking.

Rates will remain on hold for most of 2012, but the Federal Reserve might introduce a new set of quantitative easing. Thankfully, inflation moved away from the high. It should help consumers for the most part of 2012, as commodities will temporarily retrace part of the gains. With bonds at the high-end of the range and stocks declining, the real estate business might provide some opportunity over the longer-run.

The market stays overall weak. However, mortgage rates are softening and housing prices appear to be designing a bottom at current levels. Since 1969, prices topped roughly every 9 years (1969, 1981, 1990, 1999, and 2007) and bottomed every 10 years (1971, 1982, 1992, and 2002). From top to bottom, declines lasted for about 2 years (69/71, 81/83, 90/92, 07/09. New highs were then reached after 3/5 years from the bottom. The current decline started in 2007.

The sovereign debt crisis could escalate in 2012.

According to U.B.S economists, the euro zone economy should contract 0.7% next year, compared to this year expected growth of 1.6%. In effect, the euro summit agreement is just at its genesis. Reforms are welcomed by the financial community, but are not appreciated by the electorate. Mario Monti, the new Italian prime minister, said Europe's future is in Italy hands. His government has just begun a new series of reforms, which will include a large tax increase for the majority of the population. Malcontent is already mounting. Faith in Europe has never been so thin.

Greece could default within the first six months of next year. I.M.F. mission chief in Greece Poul Thompsen said Greece does not have any more room for tax collection. So, more public companies could be out of business soon. The I.M.F. expects Greece's G.D.P. to fade by 6% in 2011 and by 3% in 2012. The government has a hard time passing the reforms. Citizens are exhausted after two years of austerity measures.

In the mean time, the E.C.B confirmed that refinancing operations with Spanish banks have increased to the highest level since September 2010. The new government of Mr. Rajoy has promised to restructure the banking system, focusing mainly on mortgage loans. The measures have already been criticised by the I.M.F, which would prefer banks to support the economy instead of reducing the balance sheet.

The sovereign debt crisis has not reached its climax yet. A deeper decline of the euro and stocks are in the cards. Against the U.S. dollar, the next targets are 1.28, 1.22 and 1.16. What could happen next? A new increase of commodity prices, supported by a strong Chinese economy, should penalize the dollar and support stocks toward the high of current bearish cycle. The euro might test the top reached in 2008, before eventually capitulating. It happened in 1980 and 1995.