“Our strategy for 2009 is to gradually increase risk"

Some good news from Bloomberg:

"Dollar Rally Fizzling as Fed Triggers Risk Appetite (Update3)
By Bo Nielsen and Ye Xie

Jan. 5 (Bloomberg) -- The dollar, yen and Swiss franc may weaken this year against 2008’s biggest losers in the currency markets as the global economy starts to recover, the largest foreign-exchange strategists and investors say.

The winners will be the Brazilian real, Indonesian rupiah and Polish zloty as investors return to higher-yielding assets, according to Bloomberg News surveys. The dollar may strengthen versus the euro and Japanese yen, while dropping against the British pound.

“Our strategy for 2009 is to gradually increase risk( GOOD ),” said Maxime Tessier, head of foreign exchange in Montreal at Caisse de Depost et Placement du Quebec, which is Canada’s largest pension-fund manager, with C$155 billion ($130 billion) in assets. “A year from now, I definitely want to be on the short side on the dollar. We’ll see capital flows out of the U.S. again( WE'LL BE PAYING TOO LITTLE INTEREST, AND THE FLIGHT TO SAFETY WILL HAVE ABATED. ).”

While the International Monetary Fund cut its 2009 growth forecast for the world economy to 2.2 percent in November from 3.9 percent, investors are growing more confident( TRUE ) as central banks lower interest rates and governments earmark trillions of dollars for fiscal stimulus( AS THE GOVERNMENT INTERVENES. GOT THAT. ). The Dollar Index that tracks the currency against six of the U.S.’s biggest trading partners fell 6 percent last month, the most since July 1985, after rising 18 percent from June to the end of November.

The dollar lost steam as the Federal Reserve cut its target rate for overnight loans between banks to as low as zero and poured $8.5 trillion into the financial system. Treasury yields fell to records last year and rates on bills dropped below zero( ZIRP ) last month for the first time as investors sought the safety( EXPLICIT GUARANTEES ) of government debt.

Survey Results

Faster economic growth will cause the dollar to weaken to 2.30 against the real from 2.3145 at the end of 2008, according to the strategist surveys. The rupiah may follow, gaining 11 percent against the dollar to 9,850 by the end of 2010, while Poland’s zloty strengthens 13 percent to 2.62 in two years, the surveys show.

The pound may strengthen 3.5 percent to $1.51 this year, while the euro will depreciate 8.4 percent to $1.28, the strategists said. The yen, last year’s best-performing major currency, will lose 10 percent to 100 yen, they said.

Lawrence Goodman, head of emerging market currency strategy at Bank of America Corp. in New York, said countries that prove better at withstanding the global slowdown should benefit as the flight to safety slows( YES ). The dollar will decline 18 percent against the real and 19.5 percent versus the zloty, he said.

Dollar Bear

“The U.S. dollar will get weaker versus emerging-market currencies,” said Mark Mobius, who oversees about $26 billion in developing-nation assets as executive chairman of Templeton Asset Management Ltd. in Singapore, in a Dec. 24 Bloomberg Television interview. “The reason why we had this weakness in emerging-market currencies is because of the rush into the U.S. Treasuries, into dollars. I don’t think that’s sustainable( I AGREE ).”

Investors see little need to hold dollar assets( THIS IS BUITER'S WORRY ) as the Fed floods the world with greenbacks, the U.S. budget deficit swells to more than $1 trillion and with the trade gap exceeding $57 billion. China cut the share of dollars in its $1.9 trillion of reserves to about 45 percent last year from more than 70 percent in 2003, Deutsche Bank AG in Frankfurt estimates.

U.S. efforts to fix the financial system and the stimulus package promised by President-elect Barack Obama may still support the dollar by helping the world’s biggest economy recover faster than Europe and Japan.( TRUE )

Japan Outlook

Japan’s economy will probably shrink( AN EXPORT COUNTRY ) at an annual 12.1 percent pace this quarter, the sharpest drop since 1974, after reports showed industrial production and exports posted the biggest declines on record in November, Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo, said last week.

By the end of 2009, the U.S. economy will be growing at a 1.8 percent annual pace, while the euro zone will be shrinking at a 0.4 percent rate and Japan will be expanding 0.4 percent, according to Bloomberg surveys.

Deutsche Bank, the world’s biggest currency trader, is among the most bullish on the dollar( IN THE SHORT RUN ), forecasting a rally to $1.20 versus the euro, and to $1.30 against the pound, as the European Central Bank cuts its target rate to 0.75 percent this year from 2.5 percent, and the Bank of England lowers its benchmark to 0.5 percent from 2 percent.

Bank of England policy makers meet Jan. 8 and are likely to lower their target rate to 1.5 percent, according to the median estimate of 50 economists surveyed by Bloomberg. The ECB meets Jan. 15 to set borrowing costs.

U.S. Outlook

The U.S. economy will grow 1.6 percent in 2010 after contracting 2 percent this year, while the 16-member euro zone shrinks 2.5 percent in 2009 and expands 1 percent the next, according to Deutsche Bank. Treasuries due in 10 years will yield 50 basis points, or 0.5 percentage point, more than comparable German bunds by year-end, instead of about 75 basis points less currently, the bank predicts.

“Like after the Great Depression, the recession in the 1970s and the end of the Cold War, the U.S. will emerge strengthened from this crisis and our competitors won’t,” said Marc Chandler, head of currency strategy at New York-based Brown Brothers Harriman & Co. “Our policies have been very aggressive while the rest of the world has been dragging its feet.”

By year-end, the dollar will trade at $1.30 against the euro and at 100 yen, Chandler said. He predicts it will trade at $1.42 per pound.

The dollar rose to 92.96 yen at 9:16 a.m. in New York, from 91.83 yen on Jan. 2, after earlier reaching 93.57 yen, the highest level since Dec. 8. Against the euro, the dollar climbed 2.3 percent to $1.3611 from $1.3921.

Losing Bet

Selling the dollar in 2008 was a losing bet, as the Dollar Index gained 6 percent to 81.308, its first annual increase since rising 13 percent in 2005. The yen and franc also benefited from investors getting out of risky assets, with Japan’s currency appreciating 19 percent and Switzerland’s strengthening 5.7 percent versus the dollar.

The greenback’s share of foreign reserves rose in the third quarter to 64.6 percent from 63 percent at the end of June, the Washington-based IMF said Dec. 31, the biggest increase since the first three months of 2004.

Investors bought the dollar to purchase Treasuries and shield their money from credit-related losses and stock declines( EXPLICIT GUARANTEES IN A CALLING RUN ) that wiped out more than $28 trillion from equity markets. Writedowns and losses at the world’s largest financial institutions since the start of 2007 total $1 trillion, according to data compiled by Bloomberg.

‘Turning the Economy’

The biggest beneficiary was the yen, as the retreat from risk caused investors to unwind carry trades and buy back the Japanese currency that financed purchases of higher-yielding assets. The search for higher yields may trigger demand for the Australian and New Zealand dollars as money managers take advantage of central bank rates more than 4 percentage points higher than in Japan( TRUE ).

The Australian dollar, which weakened 20 percent against the U.S. dollar last year, depreciated 35 percent in 2008 to 63.67 yen. New Zealand’s dollar fell 39 percent to 52.53 yen.

Emerging markets were among the biggest losers last year as the MSCI EM Index fell 54.5 percent.

“If the governments are successful turning the economy, ironically, that will come along with a very weaker dollar,” said Chirag Gandhi, a money manager of a $2.5 billion global fixed-income fund at the Investment Board of State of Wisconsin in Madison, Wisconsin.

‘Signs of Bottoming’

Developing economies will grow 3.1 percent in 2009, following a 5.9 percent gain last year, while developed countries, including the U.S., the euro area and Japan, will contract 1.4 percent after expanding 0.9 percent in 2008, the Institute of International Finance said in its forecast released Dec. 18 in Washington. The group represents the world’s largest commercial and investment banks.

The currencies of Poland, Brazil and Indonesia will be among the best performers, Bank of America’s Goodman said. The zloty will strengthen to 2.39 per dollar by the end of June after dropping 21 percent. The real will surge to 1.90 after plummeting 30 percent and the rupiah will trade at 10,000 by the end of September, Goodman wrote.

Emerging-market bonds are starting to draw investors( GOOD NEWS ). The extra yield they demand to own the debt instead of Treasuries fell to 6.94 percentage points from 8.62 percentage points in October, according to JPMorgan’s EMBI+ Index.

“If we see some signs of bottoming, then the extreme risk aversion will start to mitigate( I AGREE ),” said Robert Kowit, who manages $3 billion of global bonds at Federated Investors Inc. in Pittsburgh. “At that point, we’ll be left with a huge amount of the dollars that have been printed and a huge amount of debt to be issued and bought.”( VERY TRUE )

We are seeing signs of a diminution in the fear and aversion to risk. How fast will this diminution occur?

"The dollar doesn’t have to go south if all the economies reflate at the same time.”

I like William Gross, so here's a chance to quote him from Bloomberg:

"By Ye Xie

Dec. 11 (Bloomberg) -- The dollar fell to a six-week low against the euro and yen as the cost of borrowing in the U.S. currency tumbled, signaling less demand for year-end funding.

The greenback also dropped after a report showed the U.S. trade deficit unexpectedly widened in October. The Swiss franc dropped against the euro and yen after the central bank reduced its main interest rate to a four-year low of 0.5 percent.

“Dollar liquidity and funding concerns are starting to fade,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second largest bank. “These factors have been important sources of support for the dollar in the past few months.”

The U.S. currency fell 1.7 percent to $1.3243 per euro at 8:40 a.m. in New York, from $1.3023 yesterday. It dropped 1.6 percent to 91.28 yen from 92.76. The euro traded at 120.77 yen, compared with 120.78 yen.

The cost of borrowing in dollars for three months in London fell to the lowest level in more than four years. The London interbank offered rate, or Libor, that banks say they charge each other for such loans slid 0.1 percentage point to 2 percent, the lowest level since September 2004, British Bankers’ Association data showed. That’s still one percentage point above the Fed target, up from an average of 16 basis points in the seven years to August 2007, when the credit freeze began.

“From a fundamental basis, there’s a case for avoiding the dollar,” said Adrian Schmidt, a London-based senior foreign- exchange strategist at the Royal Bank of Scotland Plc, the fourth-biggest currency trader. “For the moment the dollar’s on the back foot.”

How interesting.

"The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 1.2 percent at 84.449, below the 55-moving-day average of 84.5, as traders took advantage of the low liquidity to test how far it may fall, Hardman said. They will drive the dollar to $1.345 per euro this year, he said.

The dollar has gained 11 percent against the euro in 2008 as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to repatriate overseas investments to the U.S. and seek funding in the greenback.

The yen gained versus all 178 currencies tracked by Bloomberg this year as the global recession encouraged Japanese investors to bring funds back home and global equities plunged.

Japan’s currency jumped 21 percent versus the dollar, 34 percent against the euro and 66 percent against Brazil’s real as the financial crisis prompted investors to reverse carry trades, in which they purchase higher-yielding assets funded in countries where borrowing costs are lower. Japan’s benchmark rate of 0.3 percent is the lowest among major economies.

The U.S. trade deficit expanded 1.1 percent to $57.2 billion in October from a revised $56.6 billion in September, the Commerce Department said today in Washington. The gap was projected to narrow to $53.5 billion from an initially reported $56.5 billion in September, according to the median forecast in a Bloomberg News survey of 70 economists.

The U.S. budget deficit in November swelled to $164.4 billion, from $98.2 billion in the year-earlier period, as the government used taxpayer money to shore up the financial system by buying stakes in banks, the Treasury Department reported yesterday. Government revenue fell 4.2 percent, while spending soared 24 percent."

Let's see what Gross says:

"The dollar may extend its decline as the U.S. government increases its budget deficit by spending “trillions of dollars” to revive the economy, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California.

“There’s some risk” for the dollar to weaken, Gross said in an interview on Bloomberg Television yesterday. “It is fair to say other economies are doing much the same thing. The dollar doesn’t have to go south if all the economies reflate at the same time.”

Let's hope for "reflation" ( Another term. Yikes. ) , I suppose.