Currency big three caught off guard by dollar's march in 2005
Telegraph ^ | 01/02/06 | Ambrose Evans-Pritchard
Currency big three caught off guard by dollar's march in 2005 By
Ambrose Evans-Pritchard (Filed: 02/01/2006)
Citigroup, Deutsche Bank, and UBS, the three giants of global currency
trading, were all wildly wrong about the foreign exchange markets in
2005, predicting a dollar slide as America's chickens came home to
roost after years of borrow and spend.
Undaunted, the trio insist they were just early, not wrong, awaiting
vindication this year.
None of them is yet willing to call the top of the dollar's rally,
anticipating further resilience in the first quarter of 2006.
But all predict a dire second half for the greenback. Citigroup
expects a fall to $1.36 against the euro by the end of the year, with
$1.30 for UBS, and $1.27 for Deutsche Bank.
Steve Pearson, HBOS's star strategist, disagrees. Bucking the
consensus a year ago, he argued then that America's irrepressible
dynamism would drive the dollar higher, despite a current account
deficit of 6pc of GDP.
He is expecting Europe to disappoint yet again. "The US has a strong
economy, it has high yields and that's good for the dollar,'' he said,
predicting $108 against the euro this year.
Deutsche Bank, UBS, and Citigroup - the big three responsible for a
third of all global currency trades - have some explaining to do after
forecasting an average level of $1.40 against the euro in 2005.
Warren Buffett and Bill Gates, the world's two richest men, were also
caught off guard.
Mr Buffett shorted his own currency to the tune of $22billion, saying
the world was "choking on a diet of excess dollars".
In the end, the dollar finished at $1.1838, up 14pc against the euro,
15pc up against the yen, and gave sterling its bloodiest nose since
1992, when the pound crashed out of the Exchange Rate Mechanism.
All misjudged the effect of tighter US monetary policy. The Federal
Reserve has raised rates 13 times from 1pc to 4.25pc since June 2004.
This rare trebling of the cost of money was a world away from the
zero-rate policy in Japan, and the near paralysis of the European
Central Bank. It fuelled a lucrative "carry trade" as funds borrowed
cheaply to re-lend at much higher rates in America, switching yen,
euros, Swiss francs, and Swedish krone into dollars.
--
"The president and I cannot prevent certain politicians from losing
their memory, or their backbone, but we're not going to sit by and
let them rewrite history." -- ***** Cheney 11/16/2005
"War is God's way of teaching Americans geography" -- Ambrose Bierce
"America is a vast conspiracy to make you happy." -- John Updike
"Long term commitment in relationships is only necessary because it takes
so damn long to raise children. Marriage may well be some kind of trick
to keep the males around beyond sexual satiation." -- Captain Compassion
"Progress is the increasing control of the environment by life.
--Will Durant
Joseph R. Darancette
daranc@NOSPAMverizon.net
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