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,” said Maxime Tessier, who manages $151 billion as head of foreign exchange in Montreal at Caisse de Depot et Placement du Quebec, Canada’s largest pension-fund manager. “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.” 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 as central banks lower interest rates and governments earmark trillions of dollars for fiscal stimulus. 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 last month for the first time as investors sought the safety 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, says countries that prove better at withstanding the global slowdown should benefit as the flight to safety slows. 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.” Investors see little need to hold dollar assets 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. Japan Outlook Japan’s economy will probably shrink 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, 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 91.97 yen as of 12:28 p.m. in Tokyo from 91.83 yen late in New York on Jan. 2, when it reached 92.42 yen, the highest level since Dec. 11. Against the euro, the dollar climbed to $1.3863 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 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. 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. 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,” 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.”

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