Dollar's decline could be close to end after Europe raises rate

— -- Despite losing ground Wednesday, the dollar may be nearing the end of its protracted decline.

The greenback has traded in a narrow range against the euro since the European Central Bank raised its benchmark interest rate last Thursday, a possible sign that the worst is over for the beleaguered currency.

"The dollar is flirting around a bottom and poised to turn upwards," says Sal Guatieri, senior economist at BMO Capital Markets in Toronto. Wednesday, the dollar weakened to $1.5746 against the euro.

The past seven years, the dollar has lost 40% against an index of U.S. trading partners' currencies. That's given U.S. exports a boost, making them less expensive for foreign buyers. But it's made imported products more costly and given American tourists in Europe sticker shock.

Markets had anticipated the ECB's recent quarter-point rate increase. But amid signs of spreading economic weakness in Europe, many now believe ECB President Jean-Claude Trichet will hold off on future increases. The evidence is mixed.

Trichet told the European Parliament Wednesday that inflation was "worrying," which might suggest additional rate increases.

But Europe's central banker last week explicitly said he had "no bias" toward continuing to raise rates, now at 4.25%.

"The ECB is close to the end of its tightening campaign while the Fed has just completed its easing. That's potentially very favorable for the dollar," says Stephen Jen, currency strategist for Morgan Stanley in London.

Boosting the dollar: multiplying signs of global weakness, both in emerging markets and Europe. Germany and the United Kingdom earlier this week reported significant declines in industrial output.

A broad European slowdown would likely keep the ECB from raising rates. And with the key U.S. lending rate at a low 2%, the Federal Reserve's next move is expected to be an increase.

Higher interest rates would attract investment flows from other countries and push the dollar up.

Marc Chandler, Brown Bros. Harriman senior vice president for currency strategy, says the Fed could raise rates at its December meeting.