Risk appetite set to fade

Ferocious appetite for risk-taking in everything from Peruvian debt to global financial stocks will fade fast if, as expected, central banks end their crisis-driven liquidity programs next year.

Until then, the road ahead is rife with uncertainty as exemplified by Dubai's debt crisis and a still-fragile U.S. labor market.

Next week, Reuters hosts over a dozen leading portfolio managers and strategists at its year-end Reuters Investment Outlook Summit in New York. They will address issues including what impact the launch of world central banks "exit strategies" - stopping up the flood of money they pumped into the financial system to halt a wholesale global collapse - will have across major asset classes.

The prospect of an earlier-than-expected unraveling of the so-called "risk trade" could heighten volatility across financial markets while sapping confidence during a period of what is shaping up to be slow economic growth.

Federal Reserve Chairman Ben Bernanke is not letting his guard down. He and other policymakers recently suggested that a decision to raise interest rates will hinge on unemployment falling from a 26-1/2-year high as well as the behavior of inflation and inflation expectations.

Reuters summit comes as the world's latest obsession, the U.S. dollar, poses concerns for the U.S. central bank.

Bernanke, in rare comments on its value, said last month that the Fed is monitoring currency markets "closely" and is "attentive" to the implications of a falling dollar.

The Fed's pledge to keep interest rates near zero for a long time has fostered a U.S. dollar-funded carry trade. In market parlance, the trade refers to borrowing at low short-term rates -- in this case, in the U.S. dollar-- to buy high-yielding, long-dated securities in other markets.

The intention is to profit from the rate differential, although rising short-term rates makes this strategy riskier and less profitable.

Will the dollar carry trade last or will the dollar be the standout performer in the next year? On Friday, the dollar rose against major currencies after data showed the United States lost far fewer jobs than expected last month.

"The market is pricing in more scope for changes in Fed policy, meaning, higher interest rates. That's why we're seeing a rally in the dollar," said Paresh Upadhyaya, senior portfolio manager at Putnam Investments in Boston.

Upadhyaya helps oversee assets of about $20 billion.

"I wouldn't put too much into this dollar rally. First of all, it's a Friday and its December, so there's usually very poor liquidity. If anything, this is a technical washout," Upadhyaya said.

The Summit's group of prominent speakers -- which include BlackRock Global Chief Investment Officer for Equities Bob Doll, author and international investor Jim Rogers and Pimco Founder and Co-Chief Investment Officer Bill Gross -- will explore these topics and more during the four-day Summit event, beginning on Monday.

- Reuters