Currency Strategists: HBOS Says Dollar to Extend Rally in 2006 Jan. 2 (Bloomberg) -- HBOS Plc, Britain's fourth-largest lender and one of the foreign-exchange market's biggest dollar bulls in 2005, expects the U.S. currency to extend its gain. The dollar will advance for a second year against the euro and yen even as the Federal Reserve's interest rate increases may come to an end, said Steve Pearson, chief currency strategist at HBOS in London. Pearson expects the U.S. economy to slow this year, curbing demand among American consumers for imports and cutting the record trade deficit. The shortfall, the amount by which imports exceed exports, expanded to $68.9 billion in October. A smaller gap may mean fewer dollars have to be exchanged for other currencies to pay for imports. ``It's wrong to assume that the dollar will start to fall as the Fed stops raising rates,'' Pearson said in an interview on Dec. 29. ``What we could see is a transition to a structural support for the dollar as the trade position improves.'' HBOS forecasts the dollar will rise to $1.08 per euro by the end of the year and 125 yen. The dollar climbed 14.4 percent last year to $1.1849 versus the euro at 5 p.m. in New York on Dec. 30. It strengthened 14.7 percent to 117.75 yen. Financial markets around the world -- including Tokyo, London, New York, Hong Kong, Singapore and Australia -- are closed today for holidays. Pearson was the most accurate forecaster of exchange rates in the year to Sept. 30, according to Bloomberg calculations. `Little to Fear' HBOS had the third-most bullish forecast on the dollar against the euro at the start of 2005, predicting a rally to $1.23 by year-end. The average estimate among 53 strategists, traders and investors was for the dollar to end the year at $1.34 per euro, near a record low of $1.3666. ``The story of 2005 was the dollar defying an overwhelmingly bearish consensus,'' Pearson said. ``The dollar has little to fear from a slowdown in U.S. consumption growth as this will eventually lead to an improved external trade position.'' Investors' concern about widening U.S. trade and current account deficits helped push the dollar to a record low against the euro in 2004. Merrill Lynch & Co., Goldman Sachs Group Inc. and Deutsche Bank AG are among banks predicting the dollar will drop in 2006 as traders return their attention to the deficits. Deutsche Bank, the largest foreign-exchange trader according to a survey by Euromoney magazine, forecasts the dollar will decline to $1.27 per euro in twelve months time. Shrinking Deficit The deficit in the current account, the broadest measure of trade because it includes transfer payments and income from investments, narrowed for a second quarter to $195.8 billion in July to September. It reached an all-time high of $198.7 billion in the first three months of the year, equal to 6.5 percent of gross domestic product. ``It's possible that the deficit actually becomes a positive factor for the dollar as people see it narrowing,'' said Pearson. ``That will allow the dollar to rally even as growth in the U.S. slows down and the Fed stops raising rates.'' The Federal Reserve will probably stop raising interest rates at 4.75 percent through June 30, according to the median estimate in a Bloomberg survey published Dec. 9. Economists predict economic growth will slow to an average 3.4 percent in 2006 from 3.6 percent last year, a separate survey showed. To contact the reporter on this story: Rodrigo Davies in London at rdavies13@bloomberg.net.
EUR/USD GBP/USD H&S on monthly charts. I think Soros would agree the USD is bullish. Expansive fiscal policy which push rates higher eventually lead to an appreciated currency. Can't trust Buffett on this. If he wants to sell, he won't tell you that. Otherwise, he would be digging his own grave.