On a chilly day in London in early February, the vast River Court Auditorium at Goldman Sachs International's Fleet Street headquarters is packed. In the audience are several hundred members of the City's business elite, including hedge-fund specialists, corporate officials, and currency dealers. The big draw is Jim O'Neill, a self-deprecating Manchester native who has made his name predicting the dollar's fall against the euro and other major currencies. His lectures attract crowds of pros eager to divine his secrets.
A partner and head of global economic research at Goldman, O'Neill has won respect for prescient calls such as the one that accurately forecast that the euro would rise from $1.25 in February, 2004, to $1.30 a year later. He predicted the yen's rise in the mid-1990s and also makes calls on other currencies such as the Swiss franc and the Canadian dollar. At Goldman, a market leader in the $1 trillion-a-day currency market, O'Neill is a rock star. "He has certainly been the top foreign-exchange economist anywhere in the world in the past decade," notes Gavyn Davies, a former BBC chairman and onetime co-head of Goldman's global economics group.
O'Neill doesn't commit himself to a particular ideology. Instead he takes a pragmatic, long-term view of the global economy and looks for new ways to analyze data. The Goldman guru's trailblazing approach to parsing countries' current-account numbers shows an aptitude for tackling difficult problems with new models. In 1999, O'Neill created a "broad balance of payments," which recalibrated traditional models based on the flow of goods and services. By adding foreign direct investment and bond and equity flows to the mix, he came up with a more precise measure of capital flows. "He looks at fundamental things and doesn't get swept away by short-term events," says John Williamson, senior fellow at the Institute for International Economics in Washington.
O'Neill's broad-balance calculation essentially is a guide to supply and demand for the major currencies. It has become widely acknowledged as the gold standard for tracking investment flows. Based on this method, he continues to see weakness in the dollar to the tune of an 8% decline against the euro over the next 12 months. That would put the dollar at $1.40 to the euro by February, 2006. What will drive the decline, he says, is slowing demand for U.S. assets among foreigners. Indeed, there has been an outflow of foreign direct investment from the U.S. over the past two-and-a-half years that has paralleled a 30% drop in the value of the dollar against the euro and a 12% fall vs. the yen. While foreign central banks continue to buy U.S. Treasuries that finance America's deficit and recycle dollar-denominated profits, O'Neill says the notion that the U.S. is attracting a flood of capital is outdated.
Other foreign-exchange forecasters are less sure of the dollar's continuing weakness, noting its rise against the euro so far this year. Critics say the broad-balance calculation hasn't given O'Neill special powers of clairvoyance. "He has been negative on the dollar since the late 1990s," says David Woo, head of foreign-exchange strategy at Barclays Capital Inc. (BCS) in London. "He was initially wrong and then proved right."
O'Neill is confident his forecasts will weather such skepticism. The true test of the dollar's direction will come in the next few months. If it stays in a funk, O'Neill is likely to draw even bigger crowds at those currency-forecasting seminars.
By Laura Cohn, with Stanley Reed, in London