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SCMP Reporter

What is the best strategy for making big bucks in 2005? Bet on the weakness of the US dollar,  says Yianos Kontopoulos, Merrill Lynch's chief global foreign exchange strategist and managing director of global securities research and economics.

'The US dollar is about 4 to 5 per cent overvalued,' Mr Kontopoulos said yesterday.

The Wall Street firm is once again making an aggressive call on expectations that the yuan will appreciate by 10 per cent against the dollar in the first half of the year.

At present the yuan is allowed to trade in a narrow band,  artificially pegged at 8.28 to the dollar.

Mr Kontopoulos'  reasoning is that increasing inflation pressure in China will force  Beijing  to take measures to adjust the problem.

'There is natural pressure to use normal forces to adjust inflation,'  he said. 'And to let the yuan appreciate is the best normal force.'

Merrill expects China's inflation rate to  reach 5 per cent in the second half of the year. If the government does not take any measures to cool it down, the inflation rate could reach a 'critical danger zone' of 8 to 10 per cent, Mr Kontopoulos said.

When it reached the danger zone, the government would  need to put the breaks on and the economy would come to an abrupt stop, he said.

Mr Kontopoulos'  views sound familiar to most fund managers. In March last year, the  brokerage firm made a similar call, predicting China would revalue the yuan by 10 per cent against the dollar and simultaneously change to a peg against a basket of three currencies. This was all predicted to take place by the end of last year.

'It's about timing. Of course we hope we're right,'  he said.

He also predicts the yen to peak at 88 against the dollar in the second half of the year, compared with   103.26 as traded yesterday, on the back of a structural recovery of the Japanese economy.



Merrill states case for dollar depreciation