U.S. Trust says dollar may hit $1.40 before rebound

By Vivianne Rodrigues

NEW YORK (Reuters) - The U.S. currency may weaken to $1.40 against the euro in 2007 before a rebound, favoring investments in the eurozone and Asia, a senior fund manager at U.S. Trust said on Tuesday.

"Other currency crosses are more attractive, valuations are cheaper and rates are going up outside the U.S.," said Reiner Triltsch, a managing director at U.S. Trust, speaking at the Reuters Investment Outlook 2007 Summit in New York.

The euro traded at $1.3260 on Tuesday.

Triltsch, who helps manage international funds at U.S. Trust, also said a rapid reversal of the carry trade -- where investors borrow lower-yielding currencies and lend at higher-yielding ones -- may lead to some heavy losses in equity markets in 2007.

"The carry trade with the euro/yen, for example, has been going on for quite some time," Triltsch said. "If everybody decide to get out of it too quickly and at the same time, it's not going to be good - it's a bit worrisome."

The U.S. dollar lost about 12 percent versus the euro in 2006 and 13 percent against the British pound. Meanwhile, the yen has lost about 11 percent against the euro.

Triltsch said he expects a very gradual appreciation of the Chinese yuan versus the U.S. dollar, despite the U.S. Treasury Department's efforts to gather support in China for more currency flexibility.

"China will remain very cagey about that subject no matter how much international pressure they get," he said. "They saw what happened with Japan in the 80s and how the rapid appreciation of the yen ended up leading the country to a decade-long recession."