Dollar's weakness may last for decade, bond fund manager says

Axel Merk, the top-ranked world bond-fund manager, thanks to his three-year bet against the U.S. dollar, said the currency's weakness will persist for as long as a decade despite government efforts to prop it up.

The $355 million Merk Hard Currency Fund holds no assets pegged to the dollar, which declined to a record low in April as the Federal Reserve cut interest rates to prevent subprime-related losses from stalling the economy. That helped Merk's fund climb 11 percent in the past three years, the most of 45 rivals tracked by Morningstar in Chicago. This year, it had climbed 5.1 percent through June 12, ranking second.

The Merk fund, which opened in May 2005, has a three-year Sharpe ratio of 1.14, compared with the 0.03 Sharpe ratio for competing funds, according to data tracked by Morningstar. A higher Sharpe ratio means better risk-adjusted returns. The fund has Morningstar's highest rating of five stars.

Merk, known for his persistently negative views on the currency, said the Fed can't raise interest rates if it wants to stimulate economic growth.

"We are in a global credit contraction, consumers are tapped out and banks are overextended," he said. "We're in no position to tighten."

"A fund betting against the dollar has done quite well over the past few years," Gregg Wolper, a senior fund analyst at Morningstar, said in an interview. "The difficulty is figuring out where things will go from here as many smart investors can get currencies wrong."

Merk has invested 39 percent of the fund's assets in the euro, mainly in the form of government-backed bonds, as he believes the European Central Bank will successfully navigate its member nations through the credit crisis.

Merk has also put about 17 percent of the fund into Canadian Treasurys, two-thirds of that in a bill that matures in August, because he said the country's resource-driven economy will continue to grow. Commodities, such as oil and gold, account for about half of Canada's exports.

Canada's dollar surged 17 percent in 2007 as the price of crude oil rose 57 percent. The currency traded one-for-one with the U.S. dollar in September for the first time in three decades. Merk has 16 percent of the fund in lower-yielding Treasury bills in Switzerland, where the 2.75 percent key interest rate is the third-lowest among industrialized nations. Only the U.S. and Japan have lower interest rates.

"We often go for safety over yield," Merk said.

His second-largest holding, after the Canadian T-bill, is the SPDR Gold Trust, an exchange-traded gold fund.