Is Warren Buffett right about the dollar?

Warren Buffett isn't keen on the dollar.

The legendary investor has said he wants to spend a big chunk of the $44bn cash pile his investment fund Berkshire Hathaway has accrued. But deals are more likely to be made in overseas markets because he is concerned about the dollar's future strength.

Mr Buffett hasn't always called it right with his predictions - he opened a $21bn bet against the dollar in 2002, but had to scale it back after the currency made strong gains in 2005.

But then market-timing is notoriously difficult. And when someone with a track record like Mr Buffett's makes a call on the market, it's a good idea to factor it into your investment decisions. He may not be right tomorrow, but there's a good chance that he will be right one day.

And as far as the dollar goes, we don't think that day is too far off now...

The pound has risen sharply against the dollar in recent weeks. The latest data on inflation supported gains, as it became even more likely that UK interest rates will rise this year.

Data on producer prices showed that manufacturers are still coming under pressure from sharp rises in energy and materials costs. But the numbers for February suggests they are increasingly having more success at raising the prices they charge their customers.

Raw materials bills rose at the fastest pace in nine months during April, up 15.7% on the same time last year. But prices charged were also higher, up 2.4% on the same time last year. It's the fourth month in a row that output prices have gone up.

Money markets are now pricing in another quarter point hike in UK interest rates before the end of the year. Alan Clarke at BNP Paribas expects the Bank of England to signal that it is moving towards a hike in this week's Inflation Report, which is due out tomorrow.

Growing expectations of further rate hikes have pushed the pound to its highest levels in nearly a year against the dollar. The pound now buys more than $1.85, compared to less than $1.75 just a month ago.

But this isn't just about the pound. The dollar is falling against all the major currencies. A single dollar is now worth less than 112 yen, compared to more than 117 yen last month, and it has fallen 4% against the euro in the same time period. And of course, gold - the ultimate reserve currency - has been hitting fresh 25-year highs on an almost daily basis since the start of the year.

Federal Reserve chief Ben Bernanke sparked the latest dive in the dollar by giving the market the impression that the next US interest rate rise, due on Wednesday, is likely to be the last for a while. A weak report on new jobs for April compounded this view, sending stocks soaring, but driving the dollar down.

But even if the Fed hasn't finished with rate hikes, it's going to be tougher to support the currency simply by raising interest rates.

When interest rates are low and stable across the world, currency traders can make apparently easy money by borrowing in low interest-rate currencies and investing in high-rate ones.

But when interest rates start to rise in tandem across the world, this 'carry trade' becomes much more dangerous. The exchange rate can suddenly move against unwary investors as markets start to focus more on economic fundamentals - like trade deficits - and less on interest rate differentials.

How far could the dollar fall? We published a piece from RH Asset Management yesterday which details of how far the dollar fell back in the mid-80s under similar circumstances. If you missed it, you can catch it here: Why the dollar is set to plunge

Turning to the stock markets...

The FTSE 100 ended down 37 points at 6,067. Oil heavyweights fell back as the price of crude retreated. Oil and gas explorer BG Group was the biggest loser, down 2% to 753.5p. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 fell 4 points to 5,282, while the German Dax rose 14 to close at 6,127.

Across the Atlantic, US stocks were mixed, as Warren Buffett's concerns over the dollar unnerved investors. The Dow Jones rose 6 points to 11,584. The S&P 500 slipped 1 point to 1,324 and the Nasdaq rose 2 to 2,344.

In Asian markets this morning, the Nikkei 225 fell 82 points to 17,209. Exporters were hit by the weaker dollar. Technology stocks were also lower after US peer Dell missed first-quarter profit forecasts.

This morning, oil edged higher in New York, trading at around $69.90 a barrel. Brent crude was higher too, trading at around $70.35.

Meanwhile, spot gold was near a 25-year high, trading at around $681.50 an ounce. Silver was trading at around $13.88 an ounce.

And here in the UK, the British Retail Consortium has reported that on the high street, same-store sales rose by 6.8% in April, the best showing for UK retailers in four years. The figures were partly flattered by the late arrival of Easter this year - sales in the three months through April were little changed on last year.

And our two recommended articles for today...

Why gold is better than paper money - The problem with paper money is you can either control the quality or the quantity - and the temptation for central banks is to opt for quantity. So the truth is that gold isn't shooting up in value, say Andrew Selsby and John Robson in the On Target newsletter - it's just that other currencies are going down. To find out more, click here: Why gold is better than paper money

Is it too late to invest in the Indian stock market?- The precarious state of the US economy means that investors should be thinking about moving their assets overseas. But where is the best place to invest, asks Marc Faber in Whiskey & Gunpowder? India is becoming more and more popular as a long-term investment destination - but with the stock market at record highs, is it too late to invest in India? To find out, click here: Is it too late to invest in the Indian stock market?