Investors shouldn't short U.S. dollar yet: Pimco's El-Erian

NEW YORK (Reuters) - Mohamed El-Erian, co-chief of Pacific Investment Management Co., said on Wednesday the U.S. dollar is likely to resume its weakening trend sometime in 2009 but investors should not "short" the greenback yet.

"We have to respect the fact that the dollar is in a cyclical strengthening mode, but we believe that's not going to continue," El-Erian said via teleconference at the Reuters Investment Summit in New York.

El-Erian said the massive rally in the greenback in the past couple of months has been fueled by a rapid rise in risk aversion, unwinding of carry trades, deleveraging and underlying weakness in other currencies.

The dollar is up almost 20 percent against a basket of currencies .DXY since July.

"If you analyze why the dollar has strengthened, it has more to do with the rest of the world than with the U.S.," he said. "When that ... adjustment is over, which we believe will be in 2009, the dollar (will fall)."

Still, El-Erian warned that the investors should not rush to sell dollars yet.

"You don't want to be 'shorting' the dollar until you have evidence the deleveraging has run its course," he said. "Our sense is that about three-fourths of the deleveraging has taken place. And you don't want to short the dollar until you have evidence that the major part of the deleveraging is behind us."

El-Erian also said that 2009 will be "unambiguously" a year of sluggish or zero economic growth, with the possibility of gross domestic product declining between 1 and 2 percent. Emerging market countries and currencies have also been hit hard but the U.S. dollar remains the world's reserve currency.

"There is no other currency that has yet established itself as a reserve currency," he said. "This is not something the U.S. has lost yet."

(Editing by Leslie Adler)