MoneyNews
Tuesday, March 21, 2006

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Warren Buffett, the Oracle of Omaha, reiterated his long-term forecast of a falling dollar.

"I think over time the dollar will weaken," Buffett told reporters at the NYSE. The legendary investor rang the bell at the exchange's opening yesterday.

However, Buffett didn't put an exact timeframe on the dollar's demise. He said, "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, he recently pared down the bet from $16 billion to $13.8 billion, still a substantial wager on the dollar.

[Editor's Note: Take Warren Buffett's advice. Our latest report, The Six Sectors Poised to Skyrocket as the Dollar Declines, will show you how. Read more here.]

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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 - as some Fed policymakers 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 raised 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.

Editor's Notes:

• Buffett's multibillion-dollar bet is poised to make him even richer. Find out how you can make big money from the dollar's decline this year, too.
• If you had invested in the stocks Wayne Rogers recommended to FIR readers last year, you would have captured profits of 94% to 353%. Now he's back with his profit-packed recommendations for 2006. Don't miss out.
• Looking for more income than the paltry 3% your bank pays on CDs? Have you considered dividend stocks? Go here now.
• Did you know that at least 3 in 10 people who have high blood pressure don't even know it? Check out this report.