Asia may benefit as sovereign funds shun U.S. dollar

By Steven C. Johnson and Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The trouble at U.S. mortgage giants Fannie Mae and Freddie Mac may discourage state-run investment funds from buying U.S. dollar-denominated assets but the euro is not likely to be the main beneficiary.

Instead sovereign wealth funds, controlling over $3 trillion in assets, are likely to turn to investments in Asia, a move likely to push the U.S. dollar lower against Asian currencies including the Japanese yen.

"This is not a euro-dollar story. It's going to be a developed world versus developing world story," said Stephen Jen, who heads up Morgan Stanley's global FX strategy.

Authorities in Kuwait this week said the state's sovereign wealth fund, which manages its massive petro-dollar assets, will not buy future Fannie or Freddie debt, opting instead to boost investments in stocks, bonds, and real estate in China, India and Japan.

A Chinese think-tank also said the travails at the two U.S. government-sponsored enterprises add urgency to China's goal of diversifying its $1.8 trillion stockpile of currency reserves.

At the end of 2007, the China Investment Corporation, China's state-run fund, was thought to oversee assets worth about $200 billion, while the Kuwait Investment Authority has up to $250 billion, according to estimates by JPMorgan.

The U.S. Treasury and Federal Reserve announced a plan last weekend to shore up the balance sheets of Fannie Mae and Freddie Mac, which own or guarantee $5 trillion in debt, close to half the value of all U.S. mortgages

So far, the plan has helped to shore up investor confidence, and recent Federal Reserve data showed central banks were still adding to their agency holdings in the week to July 16.