The dollar’s dominance among global currencies is coming to an end, according to separate interviews with three of the world’s most successful investors.
The shift will affect everything from Americans’ standard of living to growth rates in emerging economies, and the main uncertainty in these gurus’ forecasts is the speed at which these changes will take place.
“I think it’s inevitable that the dollar’s role as a world currency will diminish from the dominant currency to one of a few,” said Ray Dalio, president of the hedge fund behemoth Bridgewater Associates, in a rare interview this morning on CNBC's Squawk Box. “We’ve been very lucky borrowing at cheaper rates. It will fade probably pretty quickly.”
Dalio argued that the world is divided in two right now: mature economies that are overly in debt, and emerging markets that are booming. The developing countries’ currencies are essentially tied to the dollar, yen, and euro, and because of the links, the countries are unable to remain competitive and raise their interest rates to a level that makes fiscal sense. As a result, they are in constant danger of creating asset bubbles, Dalio said.
It could “become intolerable to maintain currency links” as early as 2012, he said, and he recommends diversifying into emerging market currencies and gold.
Sam Zell, chairman of Equity Group Investments, sounded more dire warnings.
Zell said his “biggest single financial concern” was the prospect of the dollar losing its reserve-currency status.
“I can’t imagine anything being more disastrous to our country,” he said.
He noted the dollar’s substantial decline over the last several years, and pointed to “things in the market” – like the dollar’s failure to rally with other safe-haven currencies in response to the Middle East turmoil – that suggest a loss of confidence in the dollar. He said the government's "profligacy" was a major contributor to that loss, and he predicted that without the lower U.S. interest rates that come with reserve-currency status, Americans’ standard of living could decline by as much as 25%.
Warren Buffett was also critical of excessive government spending in his CNBC interview on Wednesday.
But Buffett, the chairman and chief executive of Berkshire Hathaway , cited lackluster growth as the cause of the dollar’s problems.
Noting that the U.S. economy is “inching along, not rolling along the tracks,” he predicted that the dollar will become “less important over time” as other economies grow faster and their currencies become more attractive to investors.
There’s an old Wall Street saying that rising markets climb a wall of worry. Dollar investors had better hope that’s true, since these market seers just built a worry tower.
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