Risk of dollar crisis highest in a decade: Merrill

NEW YORK (Reuters) - A dollar crisis that causes stock, bond and other asset prices to fall is a bigger risk now than at any time over the past decade, foreign exchange strategists at Merrill Lynch MER.N said on Monday.

In a research note for clients, the bank's strategists wrote they were not predicting such a crisis but acknowledged the chances of one have increased.

Among the potential triggers, they write, is a move by foreign central banks to slow accumulation of dollars or convert some existing dollar reserves into other currencies.

A move by the Middle East oil exporters to revalue their dollar pegs or ditch them altogether could also put pressure on the greenback, the report says, as could more mortgage- and credit-related problems in the U.S. financial system.

High oil prices and a weak dollar have increased inflation pressures in countries such as the United Arab Emirates, which has said it will review its currency policy.

Though there are different definitions, Merrill said it defines a dollar crisis as "intense, usually short-lived, weakness that prompts a decline, or is accompanied by a decline, in other U.S. assets."

Using those criteria, the bank said dollar crises occurred in 1977-1978, late 1987-1988, 1990 and late 1994-early 1995.

The dollar has shed more than 10 percent against a basket of six major currencies .DXY so far this year. The euro alone has gained 12.5 percent against the greenback in 2007, hitting an all-time high last week of just shy of $1.50.

The Dow Jones Industrial Average .DJI remains up about 4.3 percent on the year, while the benchmark 10-year Treasury note has also gained in price, with the yield falling to 4 percent on Monday from 4.69 percent at the start of the year.

The dollar's slide has elicited little concern from U.S. officials, who say a strong dollar is in the U.S. interest.

Some economists argue that a weaker currency will put a much-needed dent in the current account deficit, which swelled to more than 6 percent of gross domestic product in 2006.

To finance its deficit, the United States depends on foreigners to purchase U.S. assets.

Merrill said investor perception that "U.S. authorities are pursuing a weak dollar for competitive and cyclical reasons despite lip service to a strong dollar policy" could also trigger a sharper slide.

They noted, though, that a rapid decline would become "self-limiting, as the fall in U.S. asset values eventually makes them attractive from an expected return standpoint."

(Reporting by Steven C. Johnson; Editing by Neil Stempleman)