Currency head unconvinced by greenback bounce theory when numbers point to Asian bull market The US dollar might have been strengthening against global currencies in recent weeks, but Marino Valensise isn't buying it. Instead, the head of fixed income and currency for Baring Asset Management believes poor fundamentals continue to cloud the greenback, despite the growing chorus of analysts jumping into the dollar-bullish camp. In his view there is little to be gained by trading on the dollar-bounce theory, especially when the numbers point so clearly to a bull market in Asian currencies, and those of selected 'non-core economies' around the globe. 'The rally of the dollar that we have experienced is the result of higher interest rates at the short end of the curve, but the fundamental imbalances are still there,' he says. Citing the now familiar theme of Washington's twin-deficit problem, with the trade deficit having ballooned to 5.5 per cent of gross domestic product, he believes there's little chance the United States will be able to extricate itself from a crisis without painful reforms. Given what he says is a political agenda geared towards the short-term, he is not optimistic much will change before it is too late. But before stocking up on euros, take note; Mr Valensise believes the European single currency is another basket case in the making. With people living longer, pension requirements can only weigh on the fiscal health of a euro zone marked by sluggish, unbalanced growth. He cautions France could shoot down the dream of European unity today if a referendum rejects the proposed European constitution. 'That would be quite a negative event for the European union and the euro,' Mr Valensise says. Across the channel, the British pound does not look much better after a decade-long consumer borrowing binge that ranks worse on several measures than their debt-laden American counterparts. On an upbeat note, Britain has already made provision for its pension needs. 'My own view is that we should sell the three major currencies,' Mr Valensise says. The end game if politicians don't take action is grim. Research by Standard & Poor's forecasts that within 30 years the credit ratings of the European heavyweights will be lowered to junk status, much like the corporate bonds of General Motors and Ford Motors recently. Bond markets in Europe have rallied recently on news of the slowing economy, but Mr Valensise says the better part of the gains are now over. Concern, in fact, could shift towards euro bearishness. 'You don't want to buy a currency where there is no growth, you want to buy a currency in regions where the economy is growing,' he says. The corporate bond market, a stellar performer in recent years, may also be beyond its sell-by date. A recovery in corporate earnings since 2002 has been behind the momentum, but as earnings begin to slow the outlook is in question. 'The problem is that we are beginning to see the first cracks appear,' Mr Valensise says. 'Corporate earnings look toppish.' For euro-currency-based economies Ireland and Finland, the outlook is positive, as they have enjoyed an economic renaissance. Spain has also benefited, he adds, but it faces serious fiscal hurdles that leave question marks. He also likes Sweden and Norway, where the fiscal books are in balance - examples of non-core economy currencies bolstered by good growth and current account surpluses. The Polish zloty looks good, due to economic reform and EU membership, but he cautions the currency is at risk if the French scuttle the constitution. A better bond story lies in the emerging markets, thanks to a fast-improving fiscal picture. Among his favourite selections are Mexican government bonds denominated in pesos, the local currency, which offer a yield of 10 per cent against inflation of only 3.5 per cent. Another favourite is Singapore government bonds, where a healthy economy looks set to slow, in part due to tight monetary policy. 'When the economy slows that is good for bonds,' Mr Valensise says. Also favoured are Asian currencies and bonds, which are supported by economic growth, trade and current-account surpluses. 'Asia is less leveraged,' he says, adding that an upwards revaluation by China could trickle down to currencies across the region. 'Imbalances will have to be corrected but it is not clear how.'