If you had asked investors at the beginning of December what their three safest bets were for 2010, you would have heard the same answers time and time again: buy Hong Kong stocks because the market is going to go on rising; short the US dollar because America is going bust and the currency will plunge; and buy commodities, especially gold, because bullion is sure to set fresh records in the new year. As usual, most investors were able to offer eminently sensible-sounding reasons for their views. Hong Kong stocks will go on rising because a vast amount of capital is flowing from West to East, reflecting the shift in the economic power since the credit crisis. And much of that capital is heading straight for Hong Kong's stock market as the most direct play on China's supercharged rate of economic growth. As a result, many strategists and portfolio managers are looking for gains of 20 per cent or more for Hong Kong-listed stocks this year. Meanwhile, the dollar is bound to fall because the Federal Reserve is printing money like there is no tomorrow, and the United States government is running up debts it will never be able to pay off. And with short-term interest rates at zero, it is a no-brainer to borrow dollars and sell them to fund long positions in foreign currency assets offering higher returns. As a result, many investors expect the dollar to fall a further 5 to 10 per cent in 2010. And gold - well, in these days of debased currencies, good old-fashioned gold bars are the only store of value you can trust. With gold acting as a hedge against both deflation and inflation, investors are sure to push it higher in the new year. The unanimity among investors was remarkable. Unfortunately, there is a big problem with unanimity in financial markets. You see, if everyone thinks a particular asset is going to rise, then presumably everyone is already long on that asset. And if everyone is already long, then that means there are no more potential buyers, only sellers. And if there are no buyers, only sellers, there is only one way an asset can go: down. So, if everyone is uniformly bullish, it is a screaming alarm call that the market is going to fall. Sure enough, investors' favourite trades got hammered in December. The Hang Seng Index actually held up pretty well. Thanks to a late rally in thin trading, it ended the year only 5 per cent down from its November high. The dollar, meanwhile, rallied handsomely, rising 5 per cent against the euro and 4 per cent against a broader basket of currencies. And gold - well, gold slumped a hefty 9 per cent from its high set at the beginning of December. Few investors are discouraged, attributing the awkward behaviour of the markets to temporary end-of-year position squaring. Most expect a return to trend this month. Yet there are some telling reasons why markets may not co-operate. To understand why, we need to look again at the dollar. After the currency fell 13 per cent against its trade-weighted basket between March and the end of December, most investors assume further weakening is a sure thing in 2010. But US monetary conditions are changing. The Fed has already wound its debt purchase programme right down, which has pushed 10-year treasury note yields up from 2.5 per cent in March to 3.8 per cent now. With the Fed thought likely to start draining liquidity as early as March, analysts at Morgan Stanley expect a further rise to 5.5 per cent this year. That will make US debt assets look attractive compared with, for example, euro-denominated bonds, triggering a supportive flow back into an undervalued greenback. What's more, there is a chance central banks in Asia will resume their enthusiastic support of the dollar rather than grapple with domestic inflation driven by the rising commodity prices associated with a weaker greenback. As a result, Morgan Stanley is forecasting a 9 per cent rally in the trade-weighted dollar this year, enough to recoup most of last year's losses. Such a big rise would have a dire effect on the Hong Kong stock market, which has been bought heavily as a risk asset by investors funded with short dollar positions. We know that because, as the chart shows, the Hang Seng Index has been remarkably tightly correlated with other risk assets, such as the Australian dollar, which have been bought as the long arm of US dollar-funded carry trades. If the US dollar continues to rise in the new year, many of those carry trades will be unwound, accelerating the strengthening. Morgan Stanley's analysts expect that process to push many currencies back towards their fair value against the US dollar, which, for the Australian dollar, they argue is somewhere around 70 US cents. If the recent correlation between the Hang Seng and the aussie holds good, that would imply an index correction back towards the 14,000-point level. In reality, such a steep fall is highly unlikely, but the illustration does emphasise that a continued rally in Hong Kong stocks is not the foregone conclusion most investors believe. And gold - well, last year gold was bought initially as a hedge against dollar weakness and more recently as a liquidity-fuelled momentum trade. If the dollar begins to strengthen now and the liquidity gets drained away, the gold price will surely drop back again. Suddenly, investors' three safest bets for 2010 aren't looking so safe any more. But then that's financial markets for you. Happy New Year.