Mobius: Dollar drop won't attract foreign buyers

By Vivianne Rodrigues

NEW YORK (Reuters) - A further drop in the U.S. dollar in 2007 will not attract bargain-hunting investors into U.S. equities even as the weaker currency makes them cheaper, Mark Mobius, the managing director of Templeton Asset Management, said.

"Before we see that type of inflows into U.S. equities as a result of a weaker dollar, investors will want to see the U.S. addressing some issues such as the magnitude of its debt and the current account situation," Mobius said at the Reuters Investment Outlook 2007 Summit in New York.

The dollar has fallen about 12 percent against the euro and 13 percent against the British pound in 2006, and economists forecast another 15 to 20 percent drop in the greenback in 2007.

Still, "valuations in emerging markets equities make them more attractive than in more developed markets, despite multiyear gains," Mobius said. "Demand for non-U.S. assets continues to grow tremendously and we are far from a major reversal," he said.

Emerging market currencies, particularly in Asia, are likely to appreciate against the U.S. dollar, he added, while those in Eastern Europe are currently "overvalued."

"I expect the Chinese currency and even the Indian rupee to appreciate against the dollar," he said. "But in places such as Eastern Europe, we have the opposite situation - for example, the Russian rouble is extremely overvalued and one has to wonder how far it could go."

Mobius said most of the companies he holds in his $33 billion portfolio of foreign stocks practice hedging against sharp fluctuations in foreign exchange rates and that a steep decline in the U.S. dollar will not "significantly" impact his investment outlook in the short term.