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Dec. 27 (Bloomberg) -- The dollar is poised to end a two- year slide against the euro in 2008 as government-backed funds in Asia and the Middle East purchase U.S. assets, currency strategists say.

The currency will gain 3.5 percent to $1.40 per euro, according to the median estimate of 42 strategists surveyed by Bloomberg News. The dollar is down 9 percent this year to $1.4509 per euro, after weakening 10 percent in 2006.

Merrill Lynch & Co., Morgan Stanley, Citigroup Inc. and Bear Stearns Cos., based in New York, sold $20 billion in stakes to bolster capital eroded by credit-market losses. International purchases of U.S. financial assets totaled $114 billion in October, the Treasury Department said Dec. 17, the fastest pace in five months.

``Sovereign wealth funds are getting cheap deals by buying some of these bombed-out assets,'' said Gerry Celaya, chief strategist at Aberdeen, Scotland-based research company Redtower Ltd., whose $1.23 per euro forecast is the most bullish. ``The U.S. economy is resilient and good at clearing out all the dead wood and bouncing back, and the dollar will follow.''

The dollar depreciated this year as the worst U.S. housing slump since 1991 triggered $80 billion in writedowns at finance companies and forced the Federal Reserve to cut interest rates.

The Japanese yen will rally for a second year against the dollar and end eight years of losses versus the euro as U.S. and European economies slow, the strategists predicted in the survey.

Yen Rally

The yen rose 4.3 percent against the dollar in 2007 to 114.21 and fell 5.2 percent versus the euro to 165.73. As recently as July it was down 7.6 percent against the euro. The median estimate of 41 economists is for the yen to rise 3.7 percent to 110 versus the dollar and 8.3 percent to 152 per euro.

Merrill Lynch, reeling from the biggest loss in its 93-year history, received a $5 billion investment from Singapore's state-owned Temasek Holdings Pte this week. China Investment Corp., set up to manage the country's $1.46 trillion of currency reserves, last week purchased a $5 billion stake in Morgan Stanley, the second-largest U.S. securities firm. Citigroup said Nov. 27 that Abu Dhabi Investment Authority invested $7.5 billion in the biggest U.S. bank by assets.

``Asia and the Middle East know they need to lend some support to the dollar or they're all going to lose out,'' said Tony Morriss, a strategist in Sydney at Australia & New Zealand Banking Group Ltd., the second most-accurate dollar forecaster in Bloomberg surveys in the third quarter. He forecasts $1.39 per euro next year.

Current Account

A depreciating dollar boosted U.S. exports to a record in October. The shortfall in the current account, the broadest measure of trade, narrowed to $178.5 billion in the third quarter, the least in two years.

``I can't be too bearish on the dollar,'' said Richard Grace, a senior currency strategist in Sydney at Commonwealth Bank of Australia, the nation's second-largest bank and the most accurate currency forecaster in the second quarter. ``The current-account deficit should continue to improve.''

Commonwealth Bank forecasts the dollar at $1.32 per euro at the end of 2008.

Rising exports won't prevent the U.S. economy from slowing to a 1.9 percent growth rate in 2008, lower than the 2.1 percent in Europe and 4.8 percent globally, the International Monetary Fund in Washington said.

Interest Rates

Two-year Treasuries yield 68 basis points less than similar-maturity German bunds as traders bet the Fed will cut its 4.25 percent benchmark rate to below the European Central Bank's 4 percent rate.

``The U.S. has been in a six-year downtrend and that's not going to turn around,'' said Greg Gibbs, a strategist in Sydney at ABN Amro Holding NV, the largest Dutch bank, which has the most bearish forecast at $1.53 per euro. ``The U.S. will find it difficult to attract capital.''

Berkshire Hathaway Inc. Chairman Warren Buffett and Bill Gross, manager of the world's biggest bond fund, both recommended selling dollars in the past three months. Gross, chief investment officer of Pacific Investment Management Co. in Newport Beach, California, said in a Dec. 19 interview the dollar may stop falling against the pound.

The pound this year rose 1.5 percent against the dollar, after gaining as much as 8 percent, after house prices slumped. The U.K. currency will drop 1.9 percent to $1.95 in 2008, according to a Bloomberg News survey.

Erasing Gains

The yen may extend gains as traders reduce carry trades, where they obtain funds in a country with low borrowing costs and seek higher returns. The risk is currency fluctuations may erase profits.

Volatility implied by dollar-yen options expiring in one month rose to 23.5 percent on Aug. 17, the highest since January 1999 and above this year's average of 8.9 percent. Traders quote implied volatility when pricing options.

``There's little appetite for carry trades,'' said Geoffrey Yu, a strategist in Zurich at UBS AG, the second-largest currency trader. The yen may rise to 110 per dollar, he said.

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net .