Buffett, Citigroup, UBS, Wrong on Dollar, Remain Bears for 2006

Discussion in 'Economics' started by wincorp, Dec 30, 2005.

  1. wincorp


    Buffett, Citigroup, UBS, Wrong on Dollar, Remain Bears for 2006


    Dec. 30 (Bloomberg) -- Billionaire investor Warren Buffett and the biggest banks in the currency market, Deutsche Bank AG, UBS AG and Citigroup Inc., missed the dollar's rally in 2005. They're sticking with their predictions for 2006.

    Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., lost almost $1 billion, betting in part on the British currency against the dollar as the pound suffered its biggest loss since 1992. Deutsche Bank, UBS and Citigroup analysts forecast the dollar would weaken to an all-time low of $1.40 per euro. Instead, it rose 14.4 percent.

    They missed the gain by focusing on the record U.S. current account deficit instead of a widening interest-rate gap driven by the Federal Reserve's eight interest-rate increases.

    ``Who cares about the current account now,'' said Christoph Suetterlin, a currency trader in Zurich at Bank Sarasin & Cie AG, which manages about $44 billion. ``It's a side issue. The dollar's a good investment with rising interest rates and it's likely to stay that way.''

    Buffett and the analysts say they weren't wrong, just early. The U.S. currency closed Dec. 29 at 5 p.m. in New York at $1.1840 per euro and at 117.85 yen, up 14.8 percent for the year.


    ``There are signs the Fed may stop raising rates so the dollar may go down,'' said Benedikt Germanier, a currency strategist in Zurich at UBS, the second-biggest foreign exchange trading bank. This year has ``been a headache for dollar bears,'' he said.

    Bankim Chadha, head of macro currency research in New York at Deutsche Bank, forecasts a drop to $1.27 per euro by the end of 2006. Mansoor Mohi-Uddin, head of currency strategy at UBS in London, expects $1.30, and Steven Saywell, chief currency strategist at Citigroup in London, is the most bearish at $1.36.

    Together, the banks account for about 37.1 percent of trading in the $1.9 trillion-a-day market for foreign exchange, according to an April survey by Euromoney magazine.

    Buffett, who has been selling the dollar since 2002, said the currency should fall because the trade deficit, which increased to a record $68.9 billion in October, keeps widening.

    The Omaha, Nebraska-based investor said the U.S. must introduce tariffs to make imports more costly and do more to promote exports. A wider deficit means more dollars have to be exchanged for foreign currencies to pay for imports.

    ``I am a bull on sterling versus the U.S. dollar,'' Buffett told reporters in London on a May 24 conference call. The pound has since dropped 6 percent.

    Long-Term Outlook

    Buffett reduced his bets on the dollar's decline to $16.5 billion from $21.5 billion in June, according to a Nov. 4 statement from Berkshire Hathaway. The company, which had $926 million of pretax currency losses in the first half, used forward contracts, agreements to purchase or sell a currency in the future at a preset price.

    ``The policies that we're following are likely to lead to a weaker dollar over a long period of years,'' Buffett said at news conference in Boise, Idaho, on June 20. ``It's not a forecast for next week, or next month or even next year.''

    Debbie Bosanek, an assistant to Buffett in Omaha, Nebraska, said he declined to comment.

    The Fed this year raised rates eight times totaling 2 percentage points, more than any central bank except Indonesia. It signaled on Dec. 13 that more increases may be coming.

    European Central Bank policy makers lifted their benchmark by a quarter point, the first increase in five years. The Bank of England cut rates and Japan's central bank held borrowing costs at zero percent for a fourth year.

    Traders vs Analysts

    Analysts disagree with traders such as Bank Sarasin's Suetterlin on the outlook for interest rates in 2006. When the Fed increased its benchmark rate to 4.25 percent on Dec. 13, it said interest rates no longer stimulate economic growth.

    U.S. 10-year Treasuries yield 1.03 percentage points more than similar-maturity German debt. The gap has averaged 0.44 percentage point over the past decade. Its widest was 1.23 percentage points on Oct. 25, the most since 2000.

    Yields on U.S. notes rose above British government debt for the first time since July 2003 and gave investors and now pay a quarter percentage point more. The U.S. notes yield 2.86 percentage points more than Japan's government bonds.

    The New York Board of Trade's Dollar Index, which measures the U.S. currency against the euro, yen, pound, Swiss franc, Swedish krona and Canadian dollar, gained 12.7 percent, the most since 1997.

    The record $198.7 billion current account deficit in the first quarter did nothing to slow the dollar's march. By the third quarter, the dollar extended its gains as the shortfall narrowed to $195.8 billion. The current account is the broadest measure of trade because it includes services, tourism and income from investments.

    Current Account

    ``The story of the current account deficit allowed traders and analysts to justify any currency prices,'' said Steve Pearson, chief currency strategist in London at HBOS Plc, the U.K.'s fourth-largest lender. ``Sentiment got overly bearish on the dollar.''

    Pearson was the most accurate forecaster of exchange rates in the year to Sept. 30, according to Bloomberg calculations. He expects a rally to $1.08 per euro and 125 yen next year.
  2. ``The policies that we're following are likely to lead to a weaker dollar over a long period of years,'' Buffett said at news conference in Boise, Idaho, on June 20. ``It's not a forecast for next week, or next month or even next year.''

    than why cash out a chunk of your "bet?":eek:
  3. tomcole


    Thats what oracles do - they declare they're right and move on.
  4. mhashe


    If we had to wager, my bet would be on Buffet and the Big guys coming out ahead in the long run. It's not a matter of if, but when.

    imo the USD will go higher in the next few months. Why? In the short term the EUR looks like it's under attack and will break down from it's current consolidation levels. Once the pullback on the EUR begins, by default Gold and the USD (inspite of it's current inherent faults ) become the goto safe haven currencies.
  5. that was my entire point mrhashe! If he believes that the euro is going to appreciate against the dollar why reduce your position as significantly as he did??? Especially if he is going to say that he has no defined investment horizon expectancy...he is just guessing.
  6. Commodity driven currencies like CAD, AUD, etc. not counted, the rest of the major currencies are all European currencies - GBP, EUR, CHF, etc.

    Comparing the financial status country to country, I am not sure if the combined "EU" is much better in shape (economically) than US.

    A clear sign whether EUR will do better is that whether UK will again find a way to delay their merging into EU :)

    UK has been correct ever since EUR was created!
  7. RainMaker3000

    RainMaker3000 Guest

    loooking for the dollar index to trade above 102 in 2006
    dollar/yen @130
    dollar/euro @1.00

    Fed funds 5 -6% range
  8. gkishot


    Wouldn't be a fair value of 1 eur = 1 USD?
  9. RainMaker3000

    RainMaker3000 Guest

    forward price vs. spot
  10. BVM88


    It is interesting to see how people are so quick to pass judgment on Buffet without making any effort to understand his motives. I guess putting Buffet down makes many people feel good and that much more important. It’s also funny to see Buffet being labeled a loser on his currency play when he has actually made more money on it overall (since 2002) than most people will ever dream of having, but I will not go into that for I do not see it as being his primary reason on betting against the dollar. It should be apparent to anyone that actually reads Buffet’s statements that Buffet’s bet against the US dollar is merely a partial hedge. He has clearly stated from the onset that any profits Berkshire might make from currency trading would pale against the losses the company would incur from a plunging dollar. He even stated in March that he hopes his US dollar bet fails: www.thestandard.com.hk/stdn/std/Markets/GC07Ag04.html

    It is more than likely that Buffet will eventually make an obscene amount of money on his currency play but unfortunately for him he will also lose much more on his US investments if his expectations are realized. One can only imagine his dilemma with the bulk of his assets being exposed to a country that is run by ignoramuses.
    #10     Jan 1, 2006