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Warren Buffett remains bearish on the dollar

Warren Buffett remains bearish on the dollar
Updated: 6:05 p.m. ET June 23, 2005

Investor says China bid for Unocal is ‘consequence’ of trade gap

NEW YORK - Billionaire investor Warren Buffett said on Thursday in an interview on CNBC he maintains a long-term bearish view on the dollar due to the size of the U.S. trade deficit, despite the currency's recent strength.

Asked if he believes the dollar will resume its downtrend, Buffett, who heads Omaha, Nebraska-based holding company Berkshire Hathaway Inc., said: "At some point, but I have no idea whether in a year from now the dollar will be stronger or weaker. I have some feelings about five years from now."

Buffett confirmed market speculation that he had profited from the dollar's steep decline last year, but had lost money from the currency's rebound this year.

The dollar weakened by around 30 percent on a flows-weighted basis in the three years to December, but has rebounded from those multi-year lows by around 10 percent so far this year.

As of March 31, Berkshire's foreign currency contracts totaled $21.8 billion, compared with $21.4 billion at the end of 2004.

However, the massive gap in the U.S. external accounts can only push the dollar lower over time, Buffett noted.

"We are going down a path that has long been described as dangerous by some of the smartest people in this country," he said, referring to warnings from Federal Reserve Chairman Alan Greenspan and former Fed chief Paul Volcker that the U.S. current account deficit is unsustainable.

The latest available data show that the U.S. current account deficit widened to $195 billion in the first quarter of this year, or 6.4 percent of gross domestic product — a record by both measures.

This means the U.S. economy must attract around $2 billion of foreign capital every day just to balance its books, alleviate the downward pressure on the dollar and prevent a sharp spike in interest rates.

Correcting imbalances
Asked when he felt these imbalances might be corrected, Buffett said: "It may be a month from now, it may be five years from now, who knows. It's not without consequences."

One of those consequences, Buffett said, is the kind of $18.5 billion bid launched by Chinese state-run CNOOC Ltd. for Unocal Corp.

If successful, this will be the biggest overseas acquisition by a company from China.

With the U.S.-China trade deficit standing at $162 billion last year — around a quarter of the entire U.S. global trade deficit — its "an inevitable consequence" that surplus money in China is going to find its way back into U.S. assets, he said.

China currently recycles large chunks of its trade surplus with the U.S. back into Treasury securities, and so it should be no surprise that U.S. companies are also a target, Buffett said.

But the Berkshire Hathaway chief said that the fall of U.S. concerns into foreign hands was in some ways akin to an erosion of sovereignty

"If we're going to consume more than we produce, we have to expect to give away a little bit of the country," Buffett said. "It's a deeply embedded structural problem. We do not have an answer for it now."


LINK: http://www.msnbc.msn.com/id/8335811/