Soros Warns of Dollar Plunge

George Soros, the billionaire financier, has warned that the US dollar could lose one-third of its value over the next few years.

On the currency markets, meanwhile, allegations of yet another accounting scandal - this time at office equipment firm Xerox - made investors dump the US dollar and push it within a quarter of a cent of parity with the euro.

Mr Soros also warned stock markets could fall "much lower" if consumer confidence and growth faltered in the United States.

The financier made his fortune running a hedge fund which speculated against weak currencies, including the British pound, reportedly making a £1bn profit by forcing it to leave out of the European Exchange Rate Mechanism in 1992.

Speaking to BBC business correspondent Rory Cellan-Jones, Mr Soros warned the Bush administration against its "market fundamentalism", the belief that markets are self-correcting and best left alone.

Mr Soros said: "When markets are going down, then all the weaknesses come to the fore, and they need to be dealt with.

"There is basically an attitude of market fundamentalism: leave the markets alone and they will take care of themselves.

"That is a false idea. Markets do not tend to equilibrium, but tend to excesses, and you need intervention at the right time to stop these excesses going overboard."

In recent years, Mr Soros has been an increasingly vocal critic of global capitalism, calling for more regulation and warning that the greatest dangers now came from the United States.

In the last few weeks, the value of the dollar has weakened substantially on international currency markets, by around 10% against the euro, nearly reaching parity of one euro to one dollar.

The US Treasury Secretary, Paul O'Neill, is generally believed to think it would be impossible to try and stabilise the currency markets.

But Mr Soros says that further falls in the dollar could have "negative implications" for the whole world economy, making the recession deeper in Japan for example, or exacerbating a currency crisis in Brazil.

Fears about further acounting scandals and further falls in American stock markets have made international investors wary of buying US shares or dollars.

Mr Soros said that the "cult of success at any price" was partly to blame for the accounting problems in the US "where anything goes as long as you can get away with it".

He said the UK system, which held the professionals liable for giving a "fair and accurate" picture of a firm's financial position, was better than the US approach, which allowed accounting firms leeway to bend the rules.

He welcomed moves by the US regulator, the SEC, to require directors to ensure that their accounts gave an accurate picture.

But he warned that markets were now exagerating the scale of the accounting problems at US firms.

"Clearly you had an excess of optimism and overstatement, and now you are plunging into an excess of doom and gloom," he told the BBC.

Here's an article from today's WSJ that goes into more detail on his comments. This guy has his head firmly up his own ass if he really believes that this is a "Bush bear market."

LONDON - George Soros said he wouldn't be surprised if the dollar loses a third of its value during the next several years.

The billionaire philanthropist and financier said stock markets "could go much lower," too, if the U.S. quickly slips back into recession -- something he still hopes can be avoided. Citing his own books, lectures and articles, he also outlined steps that he said could prevent what he calls "the Bush bear market" from turning into a global economic crisis.

After years of rising against other major currencies, "it seems that the trend in the dollar has been reversed," Mr. Soros said. Against the euro, the dollar has fallen about 10% so far this year. Trends in currency markets tend to last several years and involve major swings, he said, so a drop of around a third in the dollar's value from recent levels "would not be unprecedented."

The 71-year-old Mr. Soros, whose speculation against feeble currencies once terrified governments, retired in the mid-1990s from active fund management but remains chairman of Soros Fund Management LLC, which advises the Quantum funds. Mr. Soros now spends much of his time preaching for more U.S. aid to poor countries, among other causes, but he also keeps a close watch on the markets.

Investors outside of the U.S. have been rattled by news of corporate excesses and accounting scandals that led to the collapse of Enron Corp. and fraud charges against WorldCom Inc., Mr. Soros noted. Making things worse, he argued, is "the apparent unconcern" of the Bush administration, which he said has shown "no particular desire to do too much about" those excesses. Partly as a result, he said, "the savers of the world have lost confidence" in the Bush administration's management of the global U.S. economy and are withdrawing their funds from the U.S.

The dollar's fall, in turn, has "some very negative implications" for the world economy, Mr. Soros said. Among them, he said, is the danger that it will frighten U.S. consumers.

In recent years, free spending by Americans has kept the world economy humming. If they take fright and slash their spending, the fragile U.S. economic recovery could reverse itself, sending the country into a "double-dip" recession, "and the stock market could go much lower," he said.

So will the consumers stop spending? "I'm agnostic on that," Mr. Soros said over lunch in the formal, beige-walled salon of a central London row house. He added that the answer should become clear soon and advised keeping a close watch on such things as U.S. auto sales, the housing market and unemployment.

If the economy continues to recover, he said, stock prices should stabilize or gain. "Right now we are at a level of excessive pessimism, and we are liable to have a rebound in the near term," he added.

For the rest of the world, Mr. Soros warned, "the U.S. will not be the motor for the global economy that it has been." The European Union, where member countries are constrained by pledges to hold down budget deficits, is unlikely to emerge as an alternative motor, he said. Unlike the U.S. Federal Reserve, the European Central Bank has proved unable to move swiftly in cutting interest rates when needed to stimulate growth. "The ECB is much more conservative -- backward-looking -- than the Fed," he said.

What is needed, Mr. Soros said, is for the U.S. to show leadership in boosting the global economy. One helpful step, he said, would be to provide Special Drawing Rights, a composite currency, to poor countries to help them build up their foreign-exchange reserves. Thus bolstered, the poor countries would have the flexibility to spend more money at home and stimulate their economies. He also favors more official aid to institutions that lend money to small businesses and home buyers in poor countries.

To resolve the crisis of confidence in Brazil, he said, the Fed and other major central banks should intervene in the market to support Brazilian government debt, becoming the lenders of last resort. "Brazil has done all the right things according to the Washington consensus" on economic policy, he said. "If there is no relief for Brazil, then the whole system is basically bankrupt because it means that good behavior doesn't get you where you want to be."

Mr. Soros berated the Bush administration for relying too heavily on market forces and rejecting calls for more intervention to help countries on the "periphery" of the global economy. Is he discouraged by President Bush's refusal to listen to such advice? No, Mr. Soros said, because "whenever the situation becomes really dire, then miraculously there's a change of attitude."

Still, Mr. Soros said, he doesn't want to see a dire turn in the global economy just to advance his causes. "It wouldn't help my financial situation," he said. He laughed briefly and then rushed off to prepare a speech on how to heal the global economy.

I have to agree with him that markets are prone to excesses. However, that is a short term look at it. People are often motivated immediately by greed and fear, so they may buy and sell in mass in a mob mentality.

But in the long run, markets are IMHO prone to stability, as cooler heads prevail eventually.

I don't think we need government intervention into markets, as if to defuse hysteria. The worldcom fiasco threw the market down 200 points at the open, but by the end of the day it climbed back to close near even. (if you had looked at the WCOM chart, you would have seen that it was already beaten up very badly before the announcement -- the markets often "know" what's up before any announcements are made). People need to use judgement, not fear and greed, when making financial decisions. If the politicans would stop fear/greed mongering in the public eye, perhaps levelheaded discussions of the nation's finances could take place and create more stability in the markets.

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