The big question on currencies is whether inves-tors will be burned by holding U.S. investments that aren’t currency-hedged. Unfortunately, the answer isn’t clear.

Some Canadian forecasters believe the Canadian dollar will come down somewhat as demand for resources is dampened by slower U.S. and global growth. This is based on the theory of the C$ as a petrodollar whose fortune is tied to the oil price — a thesis that is certainly backed by history.

Those forecasts, of course, depend on oil prices coming down. Some analysts — those at CIBC World Markets Inc. in Toronto, for one — don’t think that will happen and expect the C$ to stay high or rise further.

But some forecasters think the loonie will climb even with a decline in oil prices. Warren Jestin, chief economist at Bank of Nova Scotia in Toronto, pegs the C$ at US$1.05 at the end of 2008 and US$1.09 as 2009 draws to a close, even though he thinks oil prices will average US$86 a barrel this year and US$80 in 2009, well down from the recent levels of US$100.

Jestin’s premise is that even with oil at US$80 a barrel, there will be a lot of investment in Canada, both in the resources sector and in infrastructure. In addition, he believes downward pressure on the U.S. dollar will continue because the huge U.S. trade deficit has not come down despite a more competitive currency. The U.S. also faces mounting health-care and social security costs in the next decade as its population ages.

Most economists agree with Jestin about continued pressure on the US$, even though they don’t think that is what will drive the C$.

But there are exceptions. Lloyd Atkinson, financial and economic consultant in Toronto, expects the greenback to strengthen in 2008. He argues that the U.S. is on the edge of another technology revolution that will spur strong productivity growth and attract investors to the country’s equities and fixed-income securities. He’s forecasting the C$ at US78¢ at the end of this year. If that happens, it would greatly enhance returns on U.S. investments when translated into C$.

Further complicating the currency picture, from an investment perspective, is what will happen to other currencies.

The majority view is that the US$ will fall mainly against Asian currencies. This makes sense because those currencies haven’t gone up nearly as much as the euro, which so far — along with resources-based currencies of Canada and Australia — has carried the brunt of the US$ depreciation. But the fate of the US$ largely depends on the Asian countries.

The Bank of Japan has intervened in currency markets when necessary to curtail appreciation in the yen. One reason is that Japan is a significant exporter to China, whose currency is tied to the US$; Japan doesn’t want to lose competitiveness in that market.

China’s failure to increase its currency by more than 3%-5% a year is viewed by the U.S. as a major problem because Chinese imports are responsible for a large portion of the huge U.S. trade deficit. But currency appreciation is a problem for China. With large numbers of people migrating to the cities from rural areas every day, China’s priority is avoiding social unrest by providing jobs. Substantial appreciation of the renminbi would dampen export growth and thus job growth.

Many market analysts expect China’s gradualist approach to continue, but Jean-Guy Desjardins, president of Fiera YMG Capital Inc. in Montreal, thinks the time has come when China has to appreciate its currency against the US$ to tame fast-rising domestic inflation. He sees at least a 10%-15% rise in the renminbi in 2008, as well as a 10% appreciation in the yen, the euro staying flat and the C$ coming down with weaker resources prices.

Clément Gignac, chief economist and strategist at National Bank Financial Ltd. in Montreal, also expects a 15% rise in the renminbi in 2008, with the yen rising by 8%, the euro stabilizing and the C$ staying around par with the US$.

There’s yet another camp that thinks downward pressure on the US$ against all currencies will continue. Ross Healy, president of Toronto-based Strategic Analysis Corp. , for example, sees the greenback dropping until the U.S. goes into recession. Nandu Narayanan, chief investment officer at Trident Investment Management LLC in New York and manager of several funds for Toronto-based CI Investments Inc. , puts the odds of a US$ crisis at 50%.

@page_break@Neither Healy nor Narayanan advises investing in the U.S. unless the investments are currency-hedged.

Two factors will determine whether there is a US$ crisis: purchases of U.S. treasuries by Asian central banks and what happens to the U.S. trade deficit.

Asian central banks have been adding to their huge US$ foreign reserves each year. If they buy less, the downward pressure on the US$ will intensify. Fortunately, it isn’t in their interest to drive the greenback further down, so the odds are they will continue to buy.

The other problem is the U.S. trade deficit. It remains very high despite the substantial decline in the US$, which is making U.S.-made goods more competitive both in foreign markets and at home, where imports prices are rising as the US$ declines.

If the trade deficit doesn’t start coming down soon, investors may lose confidence in the US$ and diversify their holdings away from U.S. investments or, in the case of speculators, make bets against the US$.

However, Clancy Ethans, Rich-ardson Partners Financial Ltd. ’s chief investment officer in Winnipeg, and Andy MacLean, RPFL’s Toronto-based director of private investing, both note that money is flowing into the U.S. as international sovereign funds make opportunistic investments. As a result, they believe, the US$ is stabilizing.

In addition, many forecasters believe the U.S. trade deficit will soon begin to recede, partly because enough time has passed for the impact of the US$ depreciation to make itself felt, and partly because the U.S. economic slowdown will dampen imports. IE