The air of invincibility which has enveloped the Barclays Premier League leaders for most of the season has evaporated over the festive period.
City have taken just one point from two matches, during which time they have failed to score against West Brom and Sunderland, who inflicted only their second defeat of the campaign at the Stadium of Light on Sunday.
They were second best in their encounter at Anfield in late November but escaped with a 1-1 draw and Dalglish draws confidence from all those factors.
"They are a fantastic side but so are we so we are not going to go there and be scared," said the Scot, whose team go into the match on the back of a 3-1 win over Newcastle on Friday.
"It is all well and good saying they have loads of money but they have a good team.
"The money they have everyone else would love to have but unfortunately they don't. We will go and play whichever 11 they put on the pitch and it doesn't matter how much they cost.
"But we have the utmost respect for what they have done, we will respect and appreciate their ability.
"They are certainly a really difficult side to play against and we have our work cut out but we will work hard and fingers crossed we will come home with a result."
Liverpool have had two days extra to recover since their last outing and despite City's vast depth of playing resources Dalglish has some sympathy for counterpart Roberto Mancini.
"I know people will say he has a massive squad and enough to field two teams but you have to take the players into consideration because they are the ones who are the main attraction," added the Reds boss.
"There has to be a bit of common-sense and a game on the first and third (of January) is a bit unreasonable really.
"There has to be a reasonable amount of time for players to recover.
"But I think television has been massively helpful to many people in the Premier League so we cannot cut off the hand that feeds us."
Dalglish hopes a new year brings a change of fortune for his side after a frustrating start to the season which has seen performances not matched by their points tally.
Although the sixth-placed Reds are only five points off Tottenham, in third, their situation could have been much improved had their home record of four wins and six draws been better.
Liverpool have won more matches away from Anfield, where they have dominated most games but failed to take their chances, but Dalglish is hoping the three they scored against Newcastle to come from behind and win is a sign the tide is turning for them in front of goal.
"To get 2011 out of the way was good for us because I don't think we've had too much in the matches we have played in the first part of the season," he said.
"I don't think the players have had the reward for their performances so maybe January 3 it is going to run on and we will get some of the luck we deserved for the great play they have.
"We will look forward to 2012 and hopefully it will bring us more luck than we got in the first part of this season."
What may be more significant than luck is the return to fitness of captain Steven Gerrard after two months out with an ankle infection.
The England midfielder has made two substitute appearances, totalling 52 minutes, and scored against the Magpies.
Dalglish may be tempted to give him his first start since late October against City but sounded a word of caution.
"He is a fantastic player but we have to remember that he is still feeling his way back into it," he said.
"But his performance (against Newcastle) will give him a huge lift as much as it gave us a huge lift.
"We are delighted to get any players back, whether people describe them as big or not."
Defender Glen Johnson highlighted what Gerrard's return meant to the players when he said: "The lads believe in him and you know he is going to improve things and get things going and he does inspire people.
"Everyone kicked on a bit when he came on (against Newcastle) and it shows how pleased everyone is to have him back."