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Warren Buffett Warns Of Continual Dollar Depreciation

DailyFX Forex Fundamentals 03-07-05

By Kathy Lien, Chief Strategist of

· Warren Buffett Warns Of Continual Dollar Depreciation
· Euro Weakens On Contracting Consumer Spending
· Weak Capital Spending Data Weighs On Japanese Yen


The euro has given up some of Friday’s spectacular gains after disappointing retail sales data. Not only has sales for the Eurozone contracted for the second consecutive month according to the Retail Trade PMI survey, it has also experienced the largest decline in nine months. Rising unemployment and high oil prices continue to be at fault. With oil hitting another 4 month high and some analysts forecasting prices to reach $60 per barrel, the situation is only expected to worsen. Yet, as we have previously warned, the Eurozone will not be the only ones affected by the rise in oil prices. Oil has kept the Japanese yen from responding to the stronger economic data that we have seen over the past two weeks. It will also pinch the wallets of US consumers who are in no way immune to the higher prices at the pump. Fed speak are the only items of interest on the US calendar tomorrow. Poole and Bernanke who are both at opposite sides of the dove-hawk spectrum are scheduled to speak. Though neither are expected to deter from the Fed’s measured pace of tightening mantra, traders should pay particular attention to Bernanke’s comments about the economic outlook since he is predicted to be the top contender for Greenspan’s post as Chairman of the Federal Reserve next year. With monotonous comments from Fed officials, refreshingly blunt comments from Warren Buffett holds heavier weight in the markets. After earning $1.8 billion in profits from his $21.4 billion bet against the dollar, Buffett continues to warn about possible deterioration in the US trade deficit. In fact, he devoted 2 pages of his annual report to talking about the need for increased foreign investment in order to trigger a meaningful reversal in the ballooning trade deficit. His comments come are perfect timing since we are expecting the trade balance report on Friday and the net foreign security purchases, or TIC data the following Tuesday. His fund has also increased its cash position by 19% between 2003 and 2004. Last year, Buffett talked about the need to look abroad for investment opportunities given his skeptical views of US market valuations. If other traders join the Berkshire Hathaway bandwagon, the dollar’s fate could worsen.


The only piece of noteworthy US data today was consumer credit, which doubled expectations in the month of January. The surprising 11% jump highlights the liberal spending habits of US consumers whose debt levels are at all-time highs. Although January tends to be a seasonably strong month for credit and charge card usage, optimism around lower oil prices are sure to have boosted the spending appetite of US consumers. The over-consumption by US consumers is one of the Fed’s gravest concerns. In boosting interest rates, they hope to increase the attractiveness of savings in the US. The great big imbalance story in the global economy that is keeping the dollar under water is that the US is the home to notorious spenders whereas Asia, namely Japan is the home of notorious savers. In a nutshell, unless US consumers learn to save more and Asian consumers learn to spend more or are tempted to do so by their respective central banks, the imbalance will continue to be a major issue. Meanwhile across the Atlantic in Switzerland, the Swiss unemployment rate remained unchanged at 4.1%. Swiss fundamentals will continue to sit on the backburner until SNB President Roth speaks on the objectives for the Swiss Franc later this week.


The Sterling lost ground against most of the majors today, primarily on news that retail sales had likely declined in February. Blizzards, lower consumer confidence, and fears of impending higher borrowing costs have all been blamed for the BRC report’s expected deterioration. Many traders have already factored in the fact that a decline in consumer spending weakens the argument for a rate hike, but retail sales were not the only factors to affect the pound today. On a political level, Chancellor Brown’s comments over the weekend ruled out fiscal expansion in the March budget, increasing the likelihood that little will be done to prevent a 12 billion pound tax increase over the next five years. This, too, supports a more dovish monetary policy. Lastly, the equity markets also affected today’s currency trading in an unusual way, with the UK’s BAE Systems unveiling a $4.2B acquisition of US rival United Defense Industries, and Deutsche Bourse withdrawing its bid for the London Stock Exchange. No major economic releases are expected tomorrow, so look for trading to brace for a busy day on Wednesday, in addition to Thursday’s all important rate decision and statement.


Weaker capital spending data has prevented the Japanese yen from extending Friday’s gains. Capital spending increased only 3.5% y/y, which paled in comparison to the market’s 10.8% y/y forecast for the fourth quarter. There is a significant amount of Japanese economic data due for release this week. Household spending and machinery orders are both expected to be strong. With contracting price action in USDJPY, our expectations for a sharp breakout scenario in USDJPY are increasing. This week’s heavy Japanese economic calendar could very well provide a catalyst for a break. Meanwhile BoJ Governor Fukui reiterated the central bank’s stance on reserve diversification, which is that they have “no intention” of diversifying reserves. His comments probably came in response to comments by the Governor of the People’s Bank of China (Zhou Xiaochuan), who said that “in managing foreign exchange reserves, our traditional principle has been that we try to have diversification in terms of currency, products and risk management.” The director of China’s State Administration for Foreign Exchange also added that although they are still contemplating whether revaluation is appropriate at his time, the country will “eventually let the currency float freely.” From the sound of it, the PboC Governor is suggesting that China may be considering reserve diversification, which if this is true, it would also be negative for the US dollar.


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