Foreign exchange market analysts expect the dollar to turn higher sometime in 2010, but whether the turning point comes early or late in the year could very well depend on how long the Federal Reserve waits to raise rates.

The news that the US gross domestic product grew at a 3.5% annual rate in the third quarter warrants circumspection. The first increase in GDP following four quarters of contraction was slightly stronger than expected and was haralded as a milestone signifying that the Great Recession probably ended sometime this summer.

It is primarily public policy that is supporting GDP, and the only private sector lift came from housing investment, which came off an exptremely low base and was not a sign that housing is leading the recovery.

What is less clear is what happens to GDP when government support fades. The cash for Clunkers program to spur auto sales distorted economic data and demonstrated that, outside of a large government giveaway, there is not much demand from consumers.

There is little evidence of private sector sources of growth, and the situation is unlikely to change soon, with weak consumer confidence, a high unemployment rate, lower household wealth, declining real income and tight credit.

Interest-rate differentials are undermining the dollar, and zero interest rates are exacerbating matters by prompting players to increasingly use the dollar as the preferred funding currency for the carry trade.

The fed is aware that unwindingof carry trades can be quite violent and destablizing affairs and in order to fulfill its stated objectives of monitoring foreign exchange rates and discouraging disorderly market conditions, it can not allows the carry trade to become too large. For this reason, the dollar is expected to rebound in the first half of 2010 as US rates move higher. The move will be further fueled by the unwinding of the dollar carry trade, the extent of which will largely depend on how long the Fed delays in raising rates.