While the beginning of a new year is technically irrelevant to financial markets, the event wields enormous psychological power, in that investment strategists relish the opportunity to review the markets’ performance over the previous year and make predictions for the year ahead. This is especially true in forex markets, as currency strategists often make significant bets in the beginning of a new year. In January 2005, for example, traders believed the dollar would continue its multi-year slide against most major currencies. Accordingly, many such traders, notably Warren Buffet, made billion-dollar bets against the USD. One year later, the USD stands much higher against the Yen and Euro. Is there a lesson to be learned from this?

While the answer is unequivocally ‘yes,’ that forex markets are intrinsically unpredictable, many currency traders are once again making big bets. This time, however, most are betting that the USD will continue to appreciate. Unfortunately, Dollar bullishness appears nothing short of foolish at this point. The twin deficits are projected to continue soaring, and the US economy will likely slow in 2006. Moreover, the end to the Fed’s interest rate hikes is approaching fast, which will reduce the relative attractiveness of investing in public and private US securities. On paper, therefore, it looks like a repeat of 2005 for many wealthy investors, who are in position to get burned.