Kokusai Global Sovereign Open Fund, the biggest bond fund of Asia’s Kokusai Asset Management Company, is buying the American dollar. They currently hold the largest amount of the currency in the last 18 months.  One of the reasons the company is doing this is because they feel that the American economy’s instability may infect the rest of the world.  The companies American holdings are the highest they’ve been since April 2007 says Masataka Horii.  Horii is one of four managers who are responsible for $51.9 billion in Tokyo.  The fund upped their allocation of American dollars to 27% of its assets, up from 20% in March, the funds record low.

Says Horii, “The slowdown in growth will spread from the U.S.  Investors won’t want to take risks. Money will go back to the dollar, especially from emerging markets.”  The American dollar has fallen 3.7% over the last two weeks against six other currencies.  Major trading partners are worried that borrowing money to fund the banking sector bailout will cause the nation’s budget deficit to grow, which is what makes Kokusai favoring the dollar unusual as the Treasury Secretary Henry Paulson waits to hear on his $700 billion proposal to stabilize the banking system and send the currency lower.

While the Kokusai Global Sovereign Open Fund lost 3.23% in September, the fund outperformed last year’s benchmarks.  Horii is being bullish about it because of the Federal Reserve refraining from cutting interest rates as the financial market crumbled around them.  This helped maintain the extra yield that Japanese investors have been getting for buying up the American debt.  Overnight loans between banks in the US have target rates of 2% right now as compared to 0.5% in Japan.  Ten year Treasuries are yielding 2.30 percentage points more than Japanese securities of comparable maturity.  “The Fed won’t cut the policy rate,” Horii said. “That will favor the U.S. dollar.”

The company reduced their holdings of Asian and European debt in order to pay for the American purchases.  They also trimmed bonds in Europe to 39% and in Japan down to 9.5%.  Analysts are expecting the gross domestic product of the United States to be 1.7% by the end of 2008 and 1.5% in 2009.  Japan’s is expected to be at 1% at the end of 2008 and 1.15% in 2009.  The Euro Zone is predicting 1.35% and 1% for 2008 and 2009 respectively.

Akira Takei, the general manager for international bonds at Mizuho Asset Management Co. in Tokyo feels that the American rescue plan may help revive the world’s largest economy and allow leading investors to use funds borrowed in Japan to look for higher yields somewhere else.  “What we have seen since last week is an unwinding of the flight to quality,”’ said Takei.  Takei oversees the equivalent of $36.9 billion at the unit of Japan’s second-largest bank. “It means the yen will tend to be weaker.”