In the beginning of 2005, currency traders and economists alike, predicted the USD would continue its decline against most of the world’s major currencies, due primarily to the burgeoning twin deficits. The USD’s strong performance in the last year, therefore, came as a surprise to many, and proved that even the most astute forex experts are rarely able to make meaningful forecasts. In reflecting on the USD’s upsurge over the last 12 months, currency traders have the benefit of hindsight. As the twin deficits ballooned, central banks predictably decreased their collective purchased of USD-denominated securities. However, private investors more than compensated for this shortfall. The Homestead Act, which offered tax breaks on the repatriation of foreign earnings, combined with an environment of rising interest rates, to further buttress the Dollar. The Financial Times reports:

Warren Buffet went some way to proving his own adage correct this year, sustaining losses on the $20bn or so his investment company, bet on a falling dollar. But [he] is probably not alone in wishing his predictions could be prematurely buried this year.

Read More: Market Insight: Currency markets in 2005