Buffet warns of US pain
Stephen McMahon
October 27, 2007 12:00am
THE Australian dollar yesterday smashed through the US91c barrier for the first time in 23 years after two of the world's most admired investors forecast a downturn in the US economy that could lead to a recession.
Ahead of Wednesday's US Federal Reserve Bank meeting to discuss lowering interest rates, American billionaire Warren Buffett and veteran investor Jim Rogers both expressed negative sentiment about the US economy's growth prospects over the next few years.

The pressure on Fed chairman Ben Bernanke has increased in the past week as a slew of American economic data showed the economy was slowing dangerously.

A slowdown in US home sales, a decline in manufactured goods ordered and a rise in unemployment have combined with fears that the knock-on effects of the US sub-prime mortgage sector have some way to go. This has pushed the US dollar lower against most major currencies.

Mr Buffett said the fallout from the sub-prime mortgage market collapse in July and August would weigh down consumers spending habits until late 2009.

On a visit to South Korea, Mr Buffet said "buying power in the US" would be hurt as a result of the sub-prime meltdown.

He said that "overall the (US) economy will make progress" even if it took a few years to get back on track.

However Mr Rogers, who made his name and fortune from predicting the 1999 commodities rally, is more negative, telling London's Daily Telegraph the US economy was already "in recession".

"Many parts of industry are actually in a state worse than recession," Mr Rogers said.

"If it were not for Bernanke putting huge amounts of money into the market, the stock market would probably be down much more."

Most economists expect the Fed chairman to cut rates next week in a bid to boost economic activity.

Australian currency analysts are united that a Fed rate cut will in the short-term boost the Australian dollar, but divided over whether the Aussie can weather a slowdown in the US economy and stay above US90c.

After rising 4 per cent this week, the Aussie closed at US91.19c -- its biggest weekly gain in a month.

Deutsche Bank foreign exchange strategist John Horner said the ever increasing signs of a slowdown in the US, Japan and Europe has put the risk for the Australian currency on the downside.

He is forecasting the Aussie will remain above US90c for the next few weeks but fall to trade in the mid-80c range by mid-2008.

"The interest rate differential is a factor but not the main driver of the Australian dollar," Mr Horner said.

"If the global economy weakens we will see the Aussie dollar coming off by year end."

Deutche Bank's forecast is the Aussie will be trading at around US85c by the end of December and in the US81c vicinity by June 2008.

However Westpac currency strategist Jonathan Cavenagh is much more bullish about the Aussie's medium-term prospects.

He said the dollar will close the year in between US92c and US94c.

This perfect global economic storm has been worsened by crude oil futures hitting a new record of over $US90 a barrel after OPEC refused to lift production quotas and concerns over US oil supply.

AMP chief economist Shane Oliver warned oil could spike to $US100 a barrel next week or so.