The number of investors who think the dollar is cheap has hit its highest level since August 2008, encouraging asset managers to avoid emerging market assets, commodities and the yen, a survey showed on Tuesday.

The monthly fund managers poll by Bank of America Merrill Lynch showed investors kept their high cash levels in December, partly thanks to their expectation the dollar will appreciate. They remained overweight stocks and underweight bonds.

Supporting their bullish dollar view, slightly more investors thought the U.S. Federal Reserve would start reducing its bond-buying program this week or in January, rather than in March. A total of 43 percent of those polled expect tapering before March, while 42 percent expect it in March.

The report — which polled 188 participants who manage combined assets of $530 billion — found nearly 75 percent said the dollar was undervalued, on a net basis — the highest level since August 2008. This net reading shows the difference between overvalued and undervalued.

"The Fed is beginning to step back from its liquidity addition and the U.S. economy is expected to accelerate. The U.S. is further ahead in its recovery than others," said John Bilton, European investment strategist at BofA Merrill.

Equity holdings rose to a net 54 percent overweight from 52 percent in November. The number of investors saying equities are expensive remained at the highest level since January 2002.

This is partly why investors are not fully invested. Their cash levels remain high at 4.5 percent, compared with 4.6 percent in November.

"Investors have a long equity, short bonds and short emerging markets tilt. High cash levels mean there's no clear sell signal for equities," Bilton said.

While hoarding cash themselves, a record number of respondents thought companies were under-investing and more than half of them on a net basis thought they should increase capital expenditure, the highest since December 2005.

A net 10 percent of investors are underweight emerging equities, with South Africa, Brazil and Colombia being the most unpopular countries to invest in. They said tighter liquidity in the United States, Japan and the euro zone was the biggest medium-term challenge facing emerging markets.

The respondents thought short yen and long S&P 500 index positions were the most crowded trades. A net 64 percent of investors were underweight bonds, while a net 31 percent of them were underweight commodities, the third-highest reading on record.

Fund managers said the possibility of a sharp Chinese slowdown and a collapse in commodity markets was the biggest tail risk, followed by a euro zone sovereign and banking crisis.

A net 53 percent of investors were overweight Japan, the highest reading since May 2006, driven by their weak yen view.