DEBTS, deficits and creditworthiness may have reared their ugly heads of late in the Middle East, the Eurozone and the UK but the reappearance of economic growth in most countries by the end of the fourth quarter of 2009 should ensure that the market starts the new year with at least a cautious appetite for risk.

During the second half of 2009, the risk trade has been funded by the dollar thanks to ultra-low interest rates in the world’s largest economy. But recent rises in the greenback are suggesting that the dollar is reluctant to maintain its position as the favoured funding currency into 2010 and that traders may have to look elsewhere.

Indeed, there is already speculation that the Japanese yen could regain this position, resulting in talk that short positions on the dollar – and more specifically going long on the US dollar against the yen – could prove to be a successful trade in 2010.

There are certainly arguments that would justify this position. Firstly, the Bank of Japan’s (BoJ) move to establish a ¥10 trillion credit facility at the start of this month – rather than intervene in the currency markets – was perceived by the market to be quantitative easing in all but name.

Given that Japanese interest rates are already at 0.1 per cent – well below the 0.25 per cent level offered by the US Federal Reserve – market participants may well perceive the BoJ to be encouraging the use of the yen as a funding currency and thus start to go bullish on US dollar-yen.

Secondly, better data from the US – the astonishingly good US non-farm payrolls and the strength of November retail sales data – have acted to bring forward expectations of when the Fed will start to hike rates.

Dollar-yen has roughly been following near-term interest rate movements in the last few weeks. So if the market continues to believe that US rates will move higher, perhaps in the third quarter of 2010, then the pair could indeed carry on trending higher.

Economic fundamentals are also supporting a weaker yen. Japan has fallen into deflation according to official statistics while the Organisation for Economic Cooperation and Development (OECD) expects the country’s public debt to rise to as high as 204 per cent of GDP next year.

Given the very real fears that Japan’s economic recovery could already be stalling, there is little chance that the central bank will hike interest rates at all during 2010, despite their present near-zero level.

But in spite of all this evidence pushing down on the value of the yen, the chance of anything other than a muted recovery in dollar-yen next year is slim.

Admittedly, interest rates are still extremely low but this proved no barrier to yen strength over the past nine months or so.

What’s more, Japan’s current account surplus rose to ¥1.4 trillion in October. The existence of this huge surplus will ensure that the yen retains its core position as a perceived safe haven and this should continue to support the value of the currency.

Should there continue to be substantial concerns regarding growth, deficits, debts and creditworthiness, then any long bets that dollar-yen will rise aggressively in 2010 are likely to be taken off the table as investors retrench and become more risk averse.

Finally, the risk of a double dip recession in the US may have receded, but it is still too early to completely discard this possibility. Growth in the US during the third quarter was hugely dependent on fiscal stimulus but in 2010, fiscal constraints will see some of this support withdrawn across developed markets, which are inextricably linked through their export markets.

In all likelihood, growth will remain lacklustre next year, not just in Japan but also in the US, the Eurozone and in the UK. On this assumption, there is still the possibility that Fed interest rate hikes will be pushed back to late 2010 and therefore long dollar-yen bets are likely to be much less profitable than some foreign exchange speculators might be hoping for at the moment.