Soros Predicts Dollar Will Extend Slide, Stocks Rise (Update1)
Jan. 26 (Bloomberg) -- George Soros, who once made a billion dollars betting on a drop in the British pound, said the U.S. dollar may extend its decline in 2004 even as stocks rise.
When currencies drop they ``tend to actually pick up speed,'' Soros said in a televised interview with Bloomberg News at the World Economic Forum in Davos, Switzerland. ``Since the decline of the dollar in the short term is beneficial for the U.S. economy, the authorities actually like it.''
The dollar has dropped 14 percent against the 12-nation European common currency in the past 12 months and 9 percent against the Japanese yen, buoying U.S. exports while posing a threat to the economic recovery in Europe and Japan.
Even with the dollar's decline, the 73-year-old Soros expects investors to keep putting money into U.S. stock markets. The Standard & Poor's 500 Index, which rose 38 percent last year, is up another 3 percent so far in 2004. The Nasdaq is up 6 percent, after a 58 percent gain last year.
A drop in the dollar makes U.S. products cheaper to sell abroad, boosting American growth. Exports climbed to a three-year high in November. ``Now, it's a very dangerous game because it can get out of hand,'' Soros said. ``But at the moment, the Americans will not cooperate in any kind of intervention.''
The dollar weakened to 106.11 yen at 6:45 a.m. in London from 106.75 late in New York trading on Friday. It traded at $1.2573 per euro from $1.2582 on Friday.
Group of Seven
While there are ``early signs'' of concern from the European Central Bank, ``we are some ways away'' from official buying or selling of currencies to manipulate their value, the financier said.
Nor does Soros expect finance ministers from the Group of Seven industrial nations, meeting in Florida Feb. 6 and 7, to suggest a need to act on currencies. ``I think that they may emphasize stability a little more, but I don't expect anything very convincing,'' he said. ``There is not sufficient agreement'' among governments.
In 1992, Soros and Stanley Druckenmiller, his chief strategist, earned about $1 billion from the drop in the pound after the U.K. government abandoned sterling's peg to a basket of European currencies.
While U.S. shares may be overvalued, ``whether stocks are overvalued or not doesn't actually determine whether they go up or they go down,'' Soros said. ``So they may be overvalued, but they can get a lot more overvalued, and I would say that right now the momentum is positive.''
Spotlight on Bush
One reason is that the investment climate now ``is about as favorable as it possibly can be, because everything has been geared up to make things look good, and be good, prior to the elections,'' Soros said. ``Basically the economy is in the hands of Karl Rove, President Bush's political adviser.''
Soros, a Hungarian-born billionaire, has said he's committed to the defeat of President George W. Bush, donating $12.5 million during the past year to two independent advocacy groups --America Coming Together and MoveOn -- that oppose Bush's re-election bid.
The U.S. and global economy may be in trouble after the Nov. 2 American presidential election, he said. ``In fact everything looks pretty good, but a lot of it is quite unsustainable,'' he said. ``A lot has been borrowed, literally, of course, with the tremendous budget deficit, so I would imagine that there will be a price to pay for it afterwards.''
Federal Reserve
Wall Street firms including Merrill Lynch & Co. estimate the U.S. deficit will widen to a dollar-value record $600 billion in fiscal 2004, which ends Sept. 30.
Soros said he thinks the Federal Reserve may keep the benchmark U.S. interest rate too low for too long in an effort to stimulate employment. The overnight bank lending rate is at a 45- year low of 1 percent.
``The Fed is liable to overstay its easy money policy until a tipping point is reached,'' he said. ``And then you can have quite a sharp rise in interest rates.''
Investors are expecting that, Soros said. ``The market generally is actually short bonds. That is one of the reasons they go up in price'' even though U.S. economic data have been strong.
The yield on the benchmark 10-year U.S. Treasury note fell to as low as 3.92 percent last week before closing at 4.07 percent on Friday.
Soros expects the U.S. economy will start creating jobs soon. ``It's strange that employment hasn't picked up more. This may be a fluke, and really all the signs point to some increase in employment.''
Investing in Asia
Globally, Soros said he ``doesn't have enough'' exposure in Asia. He would consider increasing holdings in China, ``but it's very difficult to find vehicles for investing'' and ``China is in sort of an incipient asset bubble.''
Soros's $8.3 billion Quantum Endowment Fund, once the largest hedge fund in the world, climbed 15 percent last year, lagging the U.S. stock market.
Quantum did generate about half of its annual return during December, and ``there are various sorts of profit centers that are beginning to kick in,'' he said.
Soros said Chief Executive Officer Mark Schwartz and his team of managers make the investment decisions at New York-based Soros Fund Management LLC. ``It's a self-sustaining crew,'' he said. ``Basically all the decisions are made without me.''
Schwartz, the former head of Goldman Sachs Group Inc. Asia, took over as head of Soros's firm at the start of 2003. Since then, he has hired former Goldman partner Jacob Goldfield and Colm O'Shea, former managing director in fixed income at Citigroup Inc. ``I work with them,'' Soros said, ``sort of in the capacity of coach, let's say.''
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