The dollar, after climbing about 13-14 percent against the euro and the yen in 2005, can expect a weaker run in 2006 when analysts see the U.S. Federal Reserve easing the pace of interest rate hikes.
Higher U.S. borrowing costs in 2005 handed the euro its first annual loss against the dollar in four years.
The euro on Friday was trading here at US$1.1839 while the dollar was at 117.88 yen. At the start of the year the single European currency was trading close to an all-time high of US$1.36, while the dollar languishing around 104 yen.
But in the closing days of 2005, some economists were forecasting tougher times ahead for the greenback.
"It is our strong belief that the dollar rally is gradually coming to an end and that we will eventually see renewed dollar weakness in 2006," Standard Chartered economist Callum Henderson said.
Calyon's head of foreign exchange research, Mitul Kotecha, said the dollar would be "generally weaker" next year.
But Derek Halpenny, economist at The Bank of Tokyo-Mitsubishi, disagreed.
"Strength for the dollar is likely to be repeated over the course of 2006," he said.
According to his minority view, despite an anticipated pause in U.S. monetary tightening, the dollar would continue to win support from interest rates in the United States, which he says are likely to remain more attractive than in the eurozone and Japan.
The dollar was buoyed for most of 2005, following a three-year downturn, by a growing focus on interest rate differentials around the world.
The Fed in December lifted its benchmark rate by a quarter point to 4.25 percent.
But the consenus among analysts contacted here is for borrowing costs to peak next year at 4.75 percent, followed by a pause.
Recent mixed U.S. economic data could support a move by Fed policymakers to end their dollar-boosting rate increases in the new year.
The National Association of Purchasing Management-Chicago said last week that its business barometer, known more commonly as the Chicago purchasing-managers index, was at 61.5 in December - barely moved from November's robust 61.7.
In another report the National Association of Realtors said U.S. existing home sales fell 1.7 percent in November to a seasonally adjusted annual rate of 6.97 million, the lowest since March.
And the government reported that new claims for U.S. state unemployment benefits nosed higher by 3,000 to a seasonally adjusted 322,000 in the week that ended December 24.
The European Central Bank was meanwhile expected to raise interest rates again in the coming months, after increasing its key refi rate by a quarter of a percentage point to 2.25 percent in November - the first increase in more than five years.
Market consensus was for eurozone rates to peak at 3.00 percent by the end of 2006.
The dollar's rebound during 2005 followed three years during which the U.S. unit struggled in the face of concerns about gaping shortfalls in the U.S. current account and trade balance.
"Structural concerns ... faded into the background (during 2005) as markets have been placated by the strength of capital inflows into U.S. portfolio assets," said Caylon's Kotecha.
But he noted that such worries would likely resurface in 2006 as the gap narrowed between U.S. and eurozone interest rates.
Calyon and Standard Chartered are forecasting the dollar to trade at 1.27 euros by the end of 2006. U.S. investment bank Merrill Lynch predicts a level of 1.29 euros.