IT WAS not so very long ago that the dollar was firmly in favour among currency traders seeking a safe haven from UK political upheaval and the sovereign debt turmoil in the Eurozone.

But now the greenback is struggling too thanks to a raft of poor economic data, fears of a double-dip in the American housing market and the Fed’s decision to reinvest redemptions of mortgage-backed securities. While the euro and the pound are more attractive than the dollar, many traders are choosing to eschew them.

So if not G3 currencies, what to own? Kit Juckes, head of foreign exchange at Societe Generale, says: “The ‘currency du jour’ is the yen, but getting all excited about dollar-yen heading to ¥80…feels like joining a party just as the booze is about to run out.” In his view, “the Australian dollar, the Polish zloty, even the Canadian dollar – unloved by most at the moment – and the Mexican peso all look like better alternatives”. The most recent CFTC data also showed that non-commercial long positions on both the Mexican peso and the Canadian dollar jumped by 18,121 and 6,281 respectively.

For an FX trader in search of yield these currencies’ interest rate differentials are attractive. The cost of borrowing is 4.5 per cent in Australia, 3.5 per cent in Poland, 4.5 per cent in Mexico and 0.75 per cent in Canada. The latter, although low, is 50 basis points above the US rate and is on the rise – we have already seen two hikes so far this year and analysts are pencilling in further tightening later in 2010.

But these currencies have suffered from renewed risk aversion. In theory, this should present an ideal opportunity for FX traders to jump in at cheaper levels. But while they are arguably more appealing in the long run than any of the G3 currencies and a better play on global economic growth, none of these four currencies appears to have much upside remaining in the near term.

The Australian and Canadian dollars – commodity currencies – are inextricably linked to the world economy and industry’s appetite for resources. Continued slow global growth and tightening in China is likely to cap any strength. The Mexican peso’s connection with the US through the North American Free Trade Association (Nafta) limits gains, according to BNP Paribas’ Ian Stannard, but it remains cheap relative to other Latin American currencies. And while inflation fears could force the Polish MPC’s hand to raise rates, this is not expected to happen any time soon, providing little upward impetus for the zloty.

All four lack upside but any gains may be more secure than those in G3 currencies, which are liable to reverse at a moment’s notice.