Forget the low, investors betting on dollar to rise

By Jeremy Gaunt - Analysis

LONDON (Reuters) - Even as it recorded record lows against the euro on Wednesday, the out-of-favor dollar could turn out to be an unlikely beneficiary of the economic misery afflicting the United States.

Long-term investors have begun betting on the greenback to gain strength against most major currencies over the coming year, citing, among other things, the seemingly contradictory notion that it will benefit from a recession or slowdown.

One view, expounded by Investec Asset Management, has it that no matter how the U.S. and global economies proceed, the dollar does well.

Under scenario one, the U.S. has a mild recession but recovers quickly with the help of lower interest rates from the U.S. Federal Reserve. Once the Fed stops cutting, investors buy the dollar because rates and the economy will be heading up.

The second scenario is that the U.S. economy suffers a heavy downturn and drags the global economy with it. This would prompt U.S. investors to bring their money home and global investors to seek safety, both of which would boost the dollar.

"For the second part of the year we expect it to be win-win for the dollar," said Thanos Papasavvas, Investec AM's head of currency management, adding that he expects the dollar to remain weaken before then.

On top of this, dollar weakness and a slower U.S. economy in themselves work to improve the large U.S. current account deficit that has dragged down the currency in the first place.

So expectations for a stronger dollar are growing.