liquidity is becoming problematic

NEW YORK, June 13 (Reuters) - Global investors' sudden

allergy to risk is proving a boon for the U.S. currency, as

money managers sell stocks, commodities and emerging-market

assets and park the proceeds in dollars.

But this may be more a scramble for liquidity than a genuine

safe-haven bid, analysts said, pointing out that dark clouds

still lurk on the dollar's horizon. And, if the broad downtrend

that the dollar began earlier this year resumes, holders of U.S.

assets may face heavy losses.

Last week, the greenback put in its best performance against

a basket of major currencies in more than a year. On Tuesday, it

hit a fresh one-month high against the euro .

Yet, what at first blush looks like a vote of confidence may

have more to do with investor positioning.

"I wouldn't call this a flight to quality -- I'd call it a

flight to liquidity," said Shaun Osborne, chief currency

strategist at Scotia Capital in Toronto.

Indeed, analysts at Barclays Capital found the euro-dollar

exchange rate showed little correlation in the past six years to

a risk index that comprised several key risk meters.

The index included 52-week moving averages of the Chicago

Board of Trade's volatility index, a key gauge of U.S. stock

investors' fears, and the spread between yields on emerging

market and U.S. Treasury debt, which generally measures investor

appetite for riskier investments.

Michael Cheah, a portfolio manager at AIG SunAmerica Asset

Management in Jersey City, New Jersey, said markets in recent

weeks have witnessed the first leg of a two-part process.

"The first part is to unwind trades in emerging markets and

elsewhere, most of which were against the dollar," he said.

Currency analysts at Deutsche Bank said on Monday that their

latest market-positioning indicators showed short-dollar

positions -- bets on a further dollar slide -- were trimmed by a

third, while bets on the euro to rise were halved.

Even more revealing, J.P. Morgan analysts noted that long

positions on Mexican pesos went from being two times higher than

last year's average in April to 3.5 times lower by the end of

last week -- a clear sign investors are shunning risk.



SAFE HAVEN BY DEFAULT?

But once traders have bought back dollars, the question,

Cheah said, becomes "what to do next?"

For many, that may not include staying heavily exposed to

dollars for long, as "there are very evident risks out there for

the dollar," Osborne said.

Key among them is the unraveling of the happy confluence of

a steadily rising interest rate, tame inflation and solid

economic growth that buoyed the dollar in 2005.

While the Federal Reserve is still signaling rate hikes to

come, it seems now to be chasing inflation just as growth is

showing signs of cooling. Historically, that's been bad for the

dollar.

"Late-stage interest-rate hikes tend to hurt a currency, not

help it, because the economy turns over and people begin to

discount future Fed rate cuts," said David Gilmore, an economist

and partner at Foreign Exchange Analytics in Essex, Connecticut.

"That's where I think we'll end up."

The only saving grace for the greenback may be the lack of

safe-haven alternatives -- and that hardly amounts to a

resounding vote of confidence in the currency.

The most attractive safe-haven currencies tend to be from

countries running current-account surpluses. That, said Bernard

Connolly, global strategist at Banque AIG in London, rules out

the most liquid dollar alternative: the euro.

A mismatch of competitive and noncompetitive economies, the 12-country euro zone also includes retrograde governments which

run huge current-account deficits of their own.

The Swiss franc, the usual place to park money in times of

risk, is a better bet -- but a much smaller market.

"It may not be possible to find a safe-haven currency that's

big enough for everyone," Connolly said.

Another drag on the dollar is the U.S. current-account

deficit -- the broadest measure of trade and investment flows --

which has ballooned to 7 percent of gross domestic product.

The ideal scenario calls for a slow, gentle dollar slide

that gradually chips away at U.S. deficits, increases the U.S.

savings rate and makes American exports more competitive.

The dollar was oversold amid the recent "liquidity flood"

that supported emerging markets, so further unwinding of those

trades may buoy the greenback for a while, said T.J. Marta,

senior currency strategist at RBC Capital Markets in New York.

But longer term, "reserve banks will eventually diversify

holdings, and that's going to take the dollar lower," he said.