NEW YORK - Most investors have a bearish view on the dollar on expectations for U.S. interest rate cuts next year, but a money manager at a top Norwegian fund company is betting the broader market is wrong.
Torgeir Hoien, portfolio manager of three fixed-income funds at SKAGEN in Stavanger, Norway, sees a number of factors converging to support the dollar in 2007, not least of which is a possible benchmark rate hike - not cut - by the Federal Reserve early in the year. However, he expects the Fed to cut interest rates by the end of next year.
SKAGEN currently runs seven mutual fund portfolios with total assets under management of about 56 billion Norwegian crowns (about $9.0 billion).
Other dollar positives Hoien sees include the strength of the U.S. economy, which he contends is not as threatened as many suggest by the housing market slowdown, and resilient global demand for U.S. assets.
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"I'm not ruling out a rate hike early next year because (Fed Chairman) Ben Bernanke is very much focused on bringing down long-term inflation expectations," said Hoien, a former member of the executive board of the Norges Bank, Norway's central bank, from 1998 to 2002.
"Long-term inflation expectations are currently between 2.3 to 2.4 percent and that's way above (Bernanke's) comfort zone for core inflation. Partly as a result of more restrictive monetary policy than the markets currently anticipate, the dollar will not fall as much as many predict," he added.
Hoien, who manages three fixed-income funds totaling about 3 billion Norwegian crowns (about $490 million), is acting on that belief. Even while investing from a country whose currency has risen more than 8 percent against the dollar this year and 30 percent over the past five, he is overweight U.S. Treasuries in his portfolio and has been so since the start of his latest global bond fund.
SKAGEN hunts for undervalued government bonds, or those with yields it believes are too high, in countries with sound monetary policies and floating exchange rates.
"I am currently invested in American bonds because I do think they are undervalued," Hoien said.
He said he believed Bernanke would eye an inflation target of between 1 and 2 percent, below recent readings above 2 percent, which would lower the market's inflationary expectations and push bond yields down
Benchmark 10-year Treasury yields are currently at 4.6 percent, having fallen from about 5.2 percent in October this year.
UNDERESTIMATING DOLLAR STRENGTH
Another factor expected to boost the dollar is valuation. Hoien estimated that based on its real exchange rate value adjusted for inflation, the dollar is about 5 percent undervalued.
Over the past two months, the dollar has steadily declined as investors bet a slowing U.S. economy would necessitate aggressive easing by the Fed next year. While the greenback has shown pockets of strength within this current downtrend, the overall bias is toward a weaker currency in 2007.
Yet Hoein thinks markets are underestimating the dollar's strength and fundamental soundness of the U.S. economy.
"What drives the U.S. economy is not aggregate demand but good demographics, high capital accumulation, steadily growing efficiency, and developments of new businesses and industries," he said. "Fundamentals are still favorable for the United States."
Even a slowing U.S. housing market should not adversely affect consumption demand, Hoien said. "Housing rents tend to move in tandem with housing prices, largely canceling the wealth effect."
The money manager also takes issue with economists who expect the dollar to collapse due to huge U.S. external imbalances, in particular the U.S. current account deficit. That measure of U.S. trade and investment flows amounts to more than 6 percent of gross domestic product.
The prevailing concern is that foreign countries that finance the deficit could choose not to accumulate U.S. assets, spurring a dollar collapse and soaring U.S. long-term interest rates.
Such concerns are unfounded, Hoien said, because capital is a global commodity that flows "to wherever the expected rate of return is the highest."
Right now, that destination is the United States, "and that's only natural," he said. The U.S. market offers high productivity, strong rates of return and a wide array of highly liquid financial instruments.
Hoien acknowledges a "soft spot" in the United States at present, but he remains confident the world's largest economy - and its currency - will ride out this cycle.
"I don't think there would be a recession in the United States and I don't think the dollar would collapse."
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