By Colin Barr
January 25, 2011

The dollar has edged ahead of the euro in the 2011 edition of the paper currency race to the bottom.

The euro rose against the dollar for the ninth time in 11 days Monday as fears waned that a bailout of weaker economies will fracture the euro zone. The dollar hit $1.37 against the euro, putting it down 6% since the euro’s recent crisis bottom two weeks ago.

With Portugal having borrowed in the market a few times and Spain moving toward a recapitalization of its weakened regional banks, known as cajas, some investors are sounding uncharacteristically bullish about the European currency.

“I think it is very clear now for me that the euro has two choices,” strategist Bob Janjuah of Nomura said Monday on Bloomberg Television.  “It will either become the world’s next reserve currency or not. I think the resolution of that problem in the periphery — the banking sector, the required recapitalization of the European banking system — if we get that done properly, the euro wins.  I am more optimistic today than I was two months ago.”

Of course, it’s not hard to be more optimistic than Janjuah was. Last May he was among those predicting the euro would fall to parity against the dollar, for instance, and he has long said the U.S. stock market is overvalued.

His latest call on that front is that stocks here could be in for a 10% decline, which would take the S&P 500 down to somewhere in the neighborhood of 1160. Janjuah said last May that he viewed fair value for the S&P as being around 850 – more than a third below the current level.

But of course, anyone’s stock market predictions are to be taken with a grain of salt, and perhaps doubly so when people start talking about the demise of the dollar.

As Bank of America economist Ethan Harris notes in a report Monday, “Speculation that central banks are shifting away from dollar assets is so frequent that one wonders how they could have any dollar assets left.”

You May Like