The dollar, less almighty: Big investors see possible long-term currency weakness
By Steven Mufson,
Last month, Warren Buffett went shopping — abroad.
He flew to South Korea for a factory opening and called the country a “hunting ground” for investments. He also pronounced post-earthquake Japan “a buying opportunity,” and then traveled on to India, where he said he was eyeing more acquisitions.
This is Buffett’s way of betting against the U.S. dollar. Armed with about $38 billion of cash at Berkshire Hathaway, he can use dollars now to buy companies that will generate profits in other currencies for years to come. (Buffett is a director on the Washington Post Co. board.)
“I would recommend against buying long-term fixed-dollar investments,” Buffett said at a public appearance in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011 five years, 10 years or 20 years from now, I would tell you it will not.”
Buffett isn’t alone. Some of the most successful investors in the United States and the biggest money management funds are worried that trade deficits, big budget deficits and the possibility of renewed inflation will make the U.S. dollar a weak currency compared with others around the world. On Thursday, the dollar fell to an 181 / 2-month low against the euro.
Bill Gross, chief executive of the giant bond investment firm Pimco, said its flagship Total Return Fund has 8 percent of its assets — a historic high — in issues denominated in currencies other than the dollar. Earlier this year, the fund dumped its entire holdings of U.S. Treasury bonds, according to disclosures.
“The United States is one of the serial abusers of deficits and inappropriate budgets and finance,” Gross said in an interview. “Do the headlines in terms of debt ceilings and 10 percent budget deficits and the back-and-forth between Republican and Democratic orthodoxies, does that matter? Sure it does. It’s not confidence-inducing.”
Gross said the decline of the dollar is part of a longer-term trend Pimco calls “the new normal.”
“We are in this new-normal type of economy in which the developing world is growing at a far faster pace than the developed world,” he said. “And growth tends to be reflected in terms of currency value.”
The dollar may still have more room to decline against other currencies. Gross noted that the currencies of many Asian economies are still 50 percent or more below their levels before the Asian currency crisis of 1997.
In March, the dollar — adjusted for inflation — hit its lowest point against major U.S. trading partners’ currencies since its value was allowed to fluctuate in January 1973, according to Federal Reserve data.
“This is the true measure of what the dollar’s worth,” said Kenneth Rogoff, a Harvard economics professor and former chief economist at the International Monetary Fund. “It shows what you can buy with the U.S. dollar.”
A weak dollar isn’t necessarily a bad thing, Rogoff said — it can make the United States more competitive, bolster exports and help domestic companies that are vying against imported goods here in the United States.
It effectively would be playing the China card against China in a battle for manufacturing jobs.
Gross cautions investors that in the short term the dollar might not get much weaker than it has already.
“It’s not necessarily as great a bet to be short the dollar and long something else as it was 12 months ago,” he said, adding that if you are betting against the dollar, “you still get a green light, though 12 months ago it was a brighter shade of green.”
Yet some analysts say the dollar could face a rocky patch in the next few months and tumble further as Congress and the White House struggle over raising the debt ceiling and forging a budget for the 2012 fiscal year.
“One of our key themes is that there is a chance for an expedited decline in the U.S. dollar,” said Daryl Jones of the research and consulting firm Hedgeye. “The way the calendar is lining up in Washington, there will be opportunities for global currency traders to vote against the dollar.”
If the dollar were to lose its status as the world’s reserve currency — which means that most international transactions and commodities are priced in dollars — that could raise costs for the U.S. economy.
One element slowing the decline of the dollar is that currencies are in a race to the bottom. U.S. debt and deficit problems are not much worse than those of many other nations. Japan has debts equal to roughly twice its gross domestic product. Britain is hobbled by similar deficits and is slashing spending. And the euro zone is crumbling at the edges, from Greece to Portugal and from Ireland to Spain. Meanwhile China, whose currency is pegged to the dollar, is wrestling to tame rising inflation.
Jones says, however, that the United States is worse off by many measures. He pointed out in his morning note to clients Thursday that the ratio of the U.S. deficit to the country’s GDP is only slightly lower than Sierra Leone’s. He also says that Britain is tackling its deficit, bolstering the pound. And China is taking on inflation by increasing reserve requirements for banks.
Moreover, the U.S. deficits seem likely to continue for years. Under current law, the federal government will run deficits totaling $4.5 trillion over the next five years; by 2021, the federal debt held by the public would soar to $19 trillion, up 75 percent from 2011, according to the Office of Management and Budget’s 2012 proposal.
Many fund managers say the only way out of that box is a weaker dollar, reducing the value of the massive amount of U.S. debt held by foreigners and increasing the value of American investments abroad, such as Buffett’s.
“Countries like the United States do race to the bottom,” said Gross, though he added that Treasury Secretary Timothy F. Geithner would never say so. A weaker currency “makes them more competitive and reduces the burden of debt,” Gross added. Americans own about half of the outstanding federal debt, but Gross said the rest is owed “as Tennessee Williams would say, to strangers, outside the U.S.” If the United States “can devalue the value of those dollars that they owe, then all the better.”
Asked by Bloomberg News whether the U.S. dollar is still one of the safest assets, famed currency trader and fund manager George Soros said: “Well, it is considered to be riskless. But it’s really a question of the degree that you may have inflation in the future. Because . . . one of the ways in which you can reduce the burden of debt is by having some degree of inflation.”
While Soros added that he did not think there were “any great inflationary pressures in the United States” now, he did worry about the difficulty of maintaining a modest degree of inflation without letting it get out of control.
Concerns about inflation and financial instability in general have helped drive up the price of gold to record levels, above $1,500 an ounce. Some analysts also say the weak dollar is one reason why the cost of crude oil, which is priced in dollars, has been approaching record levels. On Thursday, a barrel of oil settled above $112.
But Rogoff warned against reading too much into short-term currency movements. For example, he said, the Japanese yen has increased in value since the earthquake.
“I think at the end of the day that the tsunami was not helpful to Japanese deficits or anything else,” he said. “Thousands of academic papers have shown that it’s very, very hard to explain short-term movements.”