Warren Buffett and Pacific Investment Management Co., two of the biggest forces in American investing, are joining the swelling chorus of concern that the U.S. dollar is doomed to long-term decline unless policy makers find a way to rein in government spending growth.
Mr. Buffett, in an op-ed piece in The New York Times, warns that unchecked spending and the massive debt sales necessary to finance it may result in inflation and "will certainly cause the purchasing power of the currency to melt. The dollar's destiny lies with Congress."
Pimco, which runs the world's largest bond fund, argues in a commentary published yesterday that the U.S. dollar is already losing credibility as a reserve currency, which signals a continuing decline for the greenback.
The argument is that with U.S. dollars flooding out of the Treasury, the supply will swamp demand and drive down the currency. Along with that, some believe that inflation will take off.
It's a popular thesis among some more pessimistic economists such as Nouriel Roubini, and it's a concern for big holders of U.S. Treasury bonds, such as China. At home in the United States, however, questioning the safety of the greenback has for many been taboo, almost unpatriotic.
For years, Washington has trumpeted the need for a "strong dollar" policy, making it a national priority, even as the dollar has slumped while deficits have grown. The currency is down 13.5 per cent against the euro since February and has slumped 16 per cent against the Canadian dollar since March.
With Mr. Buffett and Pimco piling on, the idea that the U.S. dollar may be in serious trouble because of all that borrowing may get more credibility in America, said Matthew Strauss, a currency analyst at RBC Dominion Securities in Toronto.
Mr. Strauss expects that the U.S. dollar may rally in coming months as investors grow concerned about the economic recovery's durability and flee riskier assets, but 2010 is likely to be a tough year for the greenback.
"Once we start going into 2010, that's where we share the concerns," Mr. Strauss said.
"At the moment, people are very focused on the recovery, but then they're going to start asking questions about the sustainability [of the budget deficits]and how are governments going to repay the cost of these extraordinary efforts."
Mr. Buffett isn't quibbling with the need for the massive stimulus programs that, in concert with tax receipts that have been devastated by the recession, are driving the U.S. into deficit. But he's concerned that once they are no longer necessary, legislators won't have the guts to cut spending or raise taxes if it has the potential to cost votes.
"Our immediate problem is to get our country back on its feet and flourishing - 'whatever it takes' still makes sense," he wrote. "Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources."
Pimco's Curtis Mewbourne, a portfolio manager who looks at emerging markets, wrote in a commentary that it's time for investors to begin considering diversifying away from U.S. dollars.
"While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative," Mr. Mewbourne said. "In combination with other factors, that likely means a continuing devaluing of the U.S. dollar versus other currencies."
Mr. Strauss expects that with a weak U.S. dollar, the Canadian dollar will rise to about 95 U.S. cents next year, and make some runs toward parity, especially if commodity prices strengthen.