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Warren Buffett: ‘Dollar Will Weaken'

Newsmax | March 22 2006

Warren Buffett, the Oracle of Omaha, reiterated his long-term forecast of a falling dollar, but without a timetable for the greenback's decline.

"I think over time the dollar will weaken," remarked Buffett to reporters at the NYSE. Buffett rang the bell at the exchange's opening Monday. "I have no idea if it'll be this year or five years from now."

The billionaire investor placed a massive $21 billion bet on the dollar in 2002 on behalf of his company, Berkshire Hathaway, and has since picked up $2 billion in profits. In 2005, the dollar rose 13%, putting Buffett on the wrong side of the move. Therefore, Buffett recently pared down the bet from $16 billion to $13.8 billion, still a substantial wager on the dollar.

So far this year, Buffett's been spot on – the dollar has fallen 2.2% as calculated by the dollar index, which measures a basket of currencies against the dollar.

And the fundamentals seem to be in place for Buffett's billion-dollar bet to pay off. The trade deficit, which indicates how much foreign investment the U.S. needs to attract, rose to a new record high of $68.5 billion in January.

According to Bloomberg, the U.S. must "attract about $2.5 billion a day from overseas, or about $75 billion a month" to make up for the trade deficit. If foreign investment stops coming in or even slows down, the dollar could crater. And that has everything to do with interest rates.

If the U.S. decides to stop raising interest rates after its March meeting next week – which some Fed policy makers have hinted – foreign investors could decide to keep their money at home. That's because they may be earning less in comparison to the risk they incur from investing abroad.

In addition, the Fed may end its rate-hiking period just as other countries start theirs. The European Central Bank hiked rates this month for the second time since December. And the Bank of Japan announced that it was changing its stance on its zero interest-rate policy, signaling that it may begin to raise rates. As the spread between interest rates compresses, foreign investors may take their cash elsewhere.

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