How Buffett Tripped Over the Dollar

Six months ago, the value of the U.S. dollar was on the firing line as it plunged to a record low vs. the euro. Amid fears that a united Europe would surmount the spendthrift U.S. as a safe haven for financial assets in a tumultuous world, investors worldwide -- led by noted Nebraska sourpuss Warren Buffett -- heaped scorn on our currency and scolded U.S. lawmakers to get the federal deficit under control.

But a funny thing happened to all those dollar bears. Their contempt for U.S. economic freedoms hasn't amounted to a hill of beans, and their positions have been smoked. The dollar has rallied massively since the start of the year against all other currencies, reflecting a swift, stunning paradigm shift in the way that global political risks are priced.

Buffett, who reportedly lifted his bet against the buck to a position of $22 billion and counting in the first quarter this year, isn't sounding quite so smug anymore. Normally an equity investor with liberal social views who rarely made forays into the foreign-exchange markets, he has had his head handed to him by more experienced currency players. Although his antidollar attack worked from 2002 through 2004, since then he has been forced to pay for attempting to mix politics and money.

Berkshire Investors Suffer

An uncharacteristic earnings growth setback at his Berkshire Hathaway(BRK.A Quote) conglomerate in the first quarter was attributed to this wrong-way wager against the greenback in favor of other currencies -- including the euro, Swiss franc, Australian dollar and British pound. The second quarter is concluding with an even worse tone for the position. It's not fair to assume that the dollar's rally will continue, but it has shown typical American scrappiness in its comeback against doomsayers and ill-wishers.

Is Buffett likely to be proven right anytime soon, or will his investors continue to suffer from his bearish posture toward the buck? It all depends on your view of the relative strength of U.S. and European economic policies and political structures.