Posted on 11/28/2003 5:03:57 AM PST by Liz
Pound surges to five-year high against US currency.
Buffett also said to be betting against greenback
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The pound surged against the dollar yesterday amid speculation that Warren Buffett and George Soros, the world's most famous speculators, are betting the US currency will plummet.
Sterling powered to a five-year high against the dollar for a second day as concerns over the US current account deficit continued to outweigh evidence of a rebounding economy.
Traders believe selling the dollar is a one-way bet, and some latched on to rumours that speculators were building "short" positions on the dollar - betting it will tumble in the coming months.
One hedge fund manager, who asked not to be named, said: "I have heard that both Soros and Buffett are shorting the dollar. There's a growing belief on Wall Street that the dollar is looking like a one-way bet downwards."
A spokesman for Mr Soros, who famously "broke" the Bank of England when the pound crashed out of the exchange rate mechanism a decade ago, said he never commented on speculation. Mr Buffett was unavailable for comment.
The surge in the pound to $1.7155, its strongest level since October 1998, was boosted after Merrill Lynch forecast the dollar would plunge a further 8 per cent by the end of next year.
Demand for the dollar has waned on concern the country will not attract enough capital to fund its record current account deficit, which is expected to break through 5 per cent of GDP this year.
In a massive revision to its forecast issued on the eve of yesterday's Thanksgiving holiday, Merrill Lynch said the pound would hit $1.85 - which would be its highest level since 1992.
The blue chip Wall Street bank said sterling would rise on signs of returning economic strength, rising interest rates and hope that the Government won't raise taxes before a 2005 election. But it warned that the surge in the pound would be short-lived as the concerns overhanging the UK - from a budget deficit, huge consumer indebtedness and a tight labour market - would come home to roost.
"Bubble trouble currencies such as the pound should continue to do well for now," it said. "But upsides in the currencies in these regions should end next year as tighter conditions threaten to burst credit bubbles and shape market expectations of lower rates."
Merrill Lynch expects the dollar to tumble to $1.33 against the euro, a drop of 12 per cent from yesterday's $1.19 value. But it cut its forecast for the euro to surge to 80p against the pound - a level that would smooth sterling's entry into the single currency - to 73p.
A surge in the pound against the dollar will be a boon for British tourists but could cause headaches for both businesses and the Bank of England.
Khuram Chaudhry, a strategist at Merrill Lynch, said: "UK investors may find company sales exposure to the US unfavourable in this scenario.A stronger domestic currency is likely to mean the Bank is less likely to raise interest rates aggressively." David Bloom, a global economist at HSBC who does not see the pound going much above $1.70, said any spike in the pound would be short-lived. "If you want to sell the dollar because you believe in the structural problems such as the current account deficit then you buy the pound but there's a downside because the UK is also looking a trade deficit, an indebted economy," he said.
"If you think those factors will cause the dollar to fall then the pound should fall as well."
He said the main beneficiary should be the euro, which has smaller deficits - despite the high-profile row over the stability and growth pact. He said HSBC was sticking with its historic forecast for a dollar-euro rate of $1.35.
Mr Bloom warned that if the pound were to fall it could tumble even further than the dollar as there would be little interest from other countries to prop it up.
It would help if we made more competitive products.
You make no sense. A cheaper dollar will increase investment in the US.
Hey, nice, very nice, deconstruction.
Soros is not the first person, nor will be the last, to believe in a misconceived and complicated ideology that sounds nice but carries little relevance. When all is said and done, Soros is merely part of a new group of commercial philosophers to have made their appearance in the post-modern period. Many of these "pomosophers" ["pomo" = post modern + "sophos" = wise] are business people and popstars with nagging conscious', who like to surround themselves with a host of intellectuals and artists in order to satisfy their vanity and make themselves feel intellectually important.
Even with Buffett's portfolio of American-based companies, he has several reasons to destroy the American economy:
1. He can find no bargains among American-based companies. As a result, he has given up on purchasing them. If he can destroy the American economy, he will be able to purchase some of those American companies at a lower price.
2. He is a buy-and-hold investor, so he can withstand any value reductions in his current holdings, which may happen as a result of reason 1 above.
this, I think, is close to the truth. Soros as much as says so in his various and sundry attempts to immortalize himself in print. i feel sorry for him, really.
This may be the last big crusade for "the man who broke the bank of England." He's gone and clouded his judgment with his warped ideology.
The dollar has been a great short, no doubt. But as soros has tried to say, things go in one direction until they go too far. Then, they reverse.
Euro hits record high above $1.20
HSBC forex analysts deem the dollar 'a one-way bet'
By Emily Church & Rachel Koning, CBS.MarketWatch.com Last Update: 3:11 PM ET Nov. 28, 2003
CHICAGO (CBS.MW) -- The dollar retreated against European currencies Friday as concerns over the growing U.S. trade imbalance continued to overshadow recent upbeat U.S. economic numbers.
Dollar selling propelled the euro to a record high above $1.20. The eurozone's single currency was recently up 0.7 percent, at $1.1982 per euro.
The dollar has tumbled as investors fret over the impact of the expanding U.S. current account deficit. Also hitting the currency are global trade tensions, global terrorism threats and stresses caused by anti-U.S. insurgency in Iraq. See David Callaway's latest column.
"No fresh incentives were needed [Friday], as the greenback's failure to rally in the face of a string of robust economic data this week suggests the U.S. dollar is one-way bet," said analysts at HSBC in a research note.
There were no U.S. economic reports scheduled for release Friday. See our Economics and Politics page for the latest U.S. economic data. Most U.S. financial markets were closed, or were closing early Friday for Thanksgiving.
Dollar investors have been nonplussed by a string of strong U.S. economic reports, beginning with bellwether reports on unemployment and GDP issued earlier this month.
"Some suggest that the fact that the U.S. is growing faster than most of the other industrialized countries means that the U.S. current account deficit is likely to grow," the HSBC group added.
Foreign demand for U.S. assets has effectively financed the gap produced by U.S. consumers' seemingly insatiable appetite for foreign-made goods. But that can't continue without posing larger risks to the U.S. and the global economies.
As a result, global analysts have expected and even welcomed a weaker dollar -- so far shouldered by the eurozone -- in order to unwind the U.S. current account deficit. But currency market observers are wary of the risks of a disorderly correction.
"In September, the net purchases of U.S. securities by foreigners totaled $4.2 billion," said David Watt, economist at Canadian bank BMO.
"Even my fuzzy math tells me that this is far below the $1.5 billion a day that the U.S. needs to fund the massive current account deficit," he told clients.
Broad-based dollar weakness
The dollar was also sharply lower against the "safe-haven" Swiss franc, recently falling 0.6 percent at 1.2915 francs. Analysts cited support for the dollar at 1.2828 francs, the multiyear low for the greenback hit in May. The Swiss currency often gains in the wake of geopolitical tensions.
The British pound hit a fresh, five-year high at $1.7201, a gain of 0.4 percent vs. its U.S. rival.
The pound has been strengthening against the dollar since the Bank of England earlier this month raised its benchmark interest rate. The quarter-point rise was the first in more than three years for Britain. For many, the move signaled the end of the downward trend in global interest rates.
The Canadian dollar rose to a new 10-year high on Friday, climbing above 77.2 cents on expectations the latest GDP data would show a stronger pace of growth.
The Canadian currency held the bulk of its gains even as the growth report fell shy of economists' predictions. The U.S. unit was recently down 0.6 percent against its northern neighbor, with one U.S. dollar fetching 1.2988 Canadian dollars.
Canada's economy expanded at a 1.1 percent annual rate in the third quarter, much improved from a 0.7 percent fall in the preceding quarter but about half the expected 2-percent-plus growth rate.
The rally in Canada's currency in the third quarter cut the export advantage to the United States, limiting Canadian production.
Dollar's yen gain continues
The dollar was up against the Japanese yen Friday in a move analysts called "supportive cross currents," given gains for the European currencies. The euro soared 1.3 percent vs. the yen to 131.36 yen
The dollar was last up 0.5 percent at 109.60 yen. The greenback has stabilized against the yen partly on bets Japanese officials will intervene to keep the dollar strong enough to support Japanese exports.
Still, "the dollar appears capped in front of 110 yen," the HSBC analysts wrote.
In a potentially brighter development for global trade, the European Union has decided it won't impose retaliatory tariffs on U.S. exports before Dec. 15.
The dollar has been hounded in recent weeks by concerns that a disruption to global trade would hurt dollar flows, in particular, among the major world currencies, or that U.S. protectionism might jeopardize an economic recovery.
Citing World Trade Organization officials in Geneva, the Associated Press reported that the EU, along with Japan and Norway, agreed to delay any imposition of import duties on U.S. goods from the previous deadline of Dec. 6.
In all, tariffs of more than $2.2 billion could be slapped on U.S. exports over Washington's decision to impose duties on steel imports. The Bush administration continues to study whether to maintain, phase out or end the steel tariffs.
Meanwhile, currency observers pooh-poohed a U.K. newspaper report that attributed the most recent round of dollar weakness to speculation that U.S. billionaire investors Warren Buffett and George Soros are short the dollar -- that is, effectively betting the dollar will decline.
"You'd expect them to be short because everyone else is. We'd be surprised if they weren't," said Paul Bednarczyk, currencies strategist at 4Cast, a London consultancy.
Amid the latest currency turbulence, U.S. stocks traded in a narrow range but ended higher in a shortened post-holiday trading session.
Soros broke would still probably have a ton more money than most of us ever will.
Well, if that is the basis for believing that they are short that is a lousey reason. Neither Buffett nor Soros have made their money doing what everyone else is doing. Everyone being short is what would provide the opportunity for the Federal Reserve to squeeze them - if they wanted to reverse the trend in the dollar.
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