I’d venture to guess that one of the top five global macro themes among investors last year must have been: “Global economic growth no longer depends on the U.S. economy.” After all, how else could you explain investors’ behavior across the various asset classes and markets?

For starters, China won’t stop gobbling up natural resources. China’s new energy habits are pumping life into both developed and emerging markets where China does its buying. And speaking of buying, expansion across Europe bolstered regional demand for Chinese goods.

In the first 11 months of 2007, we watched as the euro rose to record levels, the British pound shot past the US$2 mark and the Canadian dollar sailed beyond dollar-parity because investors are so optimistic about the global economy.

And when it comes to the U.S. economy and the U.S. dollar, the glass is half-empty at best. Price action among all currencies point to the fact the global economy will decouple from America’s economy.

But I see two scenarios set to paint the decoupling theory as either fact or fiction…

Scenario #1: Uh Oh. Recession Time for the U.S.

U.S. falls into a recession. Businesses suffer. Grueling credit losses overwhelm the financial industry. The problems eventually trickle down into the labor market, the area of the U.S. economy that keeps Americans in the global game. U.S. jobs take a hit, and then U.S. consumers take a hit.

Ding! Ding! Ding! The potential for recession lies in the consumer’s health. U.S. consumers are by far the biggest piece of America’s economic pie. Statistics show consumption accounts for roughly 70% of U.S. GDP. In other words, the economy is in big trouble if consumption recedes.

Stephen Roach, of Morgan Stanley, recently explained the overwhelming importance of U.S. consumption. As he made clear, America’s consumption contributes roughly US$9.5 trillion into global trade. That’s huge! China, for instance, is responsible for only US$1 trillion. India accounts for even less than that!

Currency Market Impact: Decoupling is thrown out the window and the global economy feels the pain of absent U.S. consumers. Nothing can sufficiently compensate for the absence of U.S. consumption. Global demand would significantly slowdown if American consumers disappeared.

And that’s when you’ll start to see an attitude change among investors. So many economies are dependent upon global growth flowing smoothly. Major currencies (euro, Australian dollar, Canadian dollar, etc.) that have performed so well will undergo a serious shakedown when the global economy is turned on its head. And without a doubt, the warts in the U.K. economy will surface. Traders will dump the pound in a major global slowdown.

Scenario #2: Phew!  No Recession in the U.S.

U.S. avoids recession. At this point, the outstanding risks seem to confirm scenario #1. But just anticipating these risks could motivate timely corrective actions to fix the problems.

For example, if companies find ways to mitigate losses and quell the fears of extended troubles, they could hopefully buy themselves time to turn things around for the better. Plus, we can practically bet on assistance coming from the last resort lender. (Fed interest rate cuts.)

The biggest goal will be avoiding job losses. Stable employment protects consumers. Of course, an American who’s willing to spend money keeps the rest of the global economy in a good position — despite the scattered economic thunderstorms that might be floating around the United States.

“WHEN POP CULTURE NOTICES HOW BAD IT IS FOR THE DOLLAR, IT’S USUALLY A GOOD TIME TO START BUYING.”

Currency Market Impact: More of the same from the currency pack. Demand for Chinese goods keeps them demanding input materials. Commodity prices remain strong. Resource-rich economies get rich selling to China, so the Australian, Canadian and New Zealand dollars go up.

But Either Way, the Dollar Looks Like a Buy in 2008

Many dollar permabears believe the U. S. will soon start looking like a Banana Republic country.
Others say the dollar could lose its status as the global reserve currency next year. I don’t see it. In fact, I’m starting to get bullish on the dollar — at least in the short-term.

We may not be there yet, but we could be very close to seeing a major change in trend for the lowly greenback. And when the dollar does turn, I think the most vulnerable currencies will be the European pack — the euro, pound and Swiss.

Five Reasons Why the Dollar May Shock You Next Year

Here are some of the key reasons why I think we are inching very close to a dollar rally…

• Improving U.S. current account as U.S. exports grow because of a weak dollar and U.S. consumers save because of the weak economy.
• U.S. exports more to emerging markets and less from Europe. This could set the stage in the months ahead for a U.S. rebound as European economies decelerate.
• Dollar sentiment hit a low recently based on survey data.
• Decoupling theory questions marks:
  • Eurozone and U.K. economies aren’t exactly looking strong.
  • China growth, though still a rumor, showing signs of “slowing” a bit.
  • Japan’s forward momentum in doubt as sub-prime woes hit there too.
  • Commodities prices are getting hit; crude fell “all the way back” under  US$90.
• Risk capital flowing into the U.S. to pick off seeming undervalued assets. For example, the Dubai capital that no one wanted when it was targeting a ports deal is now Citigroup’s White Knight as we head quickly toward the trough.
• Last, but not least, The Economist’s cover page recently showed the U.S. dollar going down in flames (the Paul Montgomery magazine cover indicator). Plus, we have supermodels and rappers telling the world they only want to be paid in euros; thus showing how smart they are.

It rings of the time when Joe Kennedy, back in the late 1920’s said he shorted stocks and made a killing because he started getting tips from shoeshine boys.

When pop culture notices how bad it is for the dollar, it’s usually a good time to start buying.

Jack Crooks is the Editor of the signature investment research service, World Currency Options. He’s also president of his own company, Black Swan Capital. Email Jack at info@worldcurrencywatch.com.