London Independent

The pound surged against the dollar yesterday amid speculation that Warren Buffett and George Soros, the world's most famous speculators, are betting the US currency will plummet.

Sterling powered to a five-year high against the dollar for a second day as concerns over the US current account deficit continued to outweigh evidence of a rebounding economy.

Traders believe selling the dollar is a one-way bet, and some latched on to rumours that speculators were building "short" positions on the dollar - betting it will tumble in the coming months.

One hedge fund manager, who asked not to be named, said: "I have heard that both Soros and Buffett are shorting the dollar. There's a growing belief on Wall Street that the dollar is looking like a one-way bet downwards."

A spokesman for Mr Soros, who famously "broke" the Bank of England when the pound crashed out of the exchange rate mechanism a decade ago, said he never commented on speculation. Mr Buffett was unavailable for comment.

The surge in the pound to $1.7155, its strongest level since October 1998, was boosted after Merrill Lynch forecast the dollar would plunge a further 8 per cent by the end of next year.

Demand for the dollar has waned on concern the country will not attract enough capital to fund its record current account deficit, which is expected to break through 5 per cent of GDP this year.

In a massive revision to its forecast issued on the eve of yesterday's Thanksgiving holiday, Merrill Lynch said the pound would hit $1.85 - which would be its highest level since 1992.

The blue chip Wall Street bank said sterling would rise on signs of returning economic strength, rising interest rates and hope that the Government won't raise taxes before a 2005 election. But it warned that the surge in the pound would be short-lived as the concerns overhanging the UK - from a budget deficit, huge consumer indebtedness and a tight labour market - would come home to roost.

"Bubble trouble currencies such as the pound should continue to do well for now," it said. "But upsides in the currencies in these regions should end next year as tighter conditions threaten to burst credit bubbles and shape market expectations of lower rates."

Merrill Lynch expects the dollar to tumble to $1.33 against the euro, a drop of 12 per cent from yesterday's $1.19 value. But it cut its forecast for the euro to surge to 80p against the pound - a level that would smooth sterling's entry into the single currency - to 73p.

A surge in the pound against the dollar will be a boon for British tourists but could cause headaches for both businesses and the Bank of England.

Khuram Chaudhry, a strategist at Merrill Lynch, said: "UK investors may find company sales exposure to the US unfavourable in this scenario.A stronger domestic currency is likely to mean the Bank is less likely to raise interest rates aggressively." David Bloom, a global economist at HSBC who does not see the pound going much above $1.70, said any spike in the pound would be short-lived. "If you want to sell the dollar because you believe in the structural problems such as the current account deficit then you buy the pound but there's a downside because the UK is also looking a trade deficit, an indebted economy," he said.

"If you think those factors will cause the dollar to fall then the pound should fall as well."

He said the main beneficiary should be the euro, which has smaller deficits - despite the high-profile row over the stability and growth pact. He said HSBC was sticking with its historic forecast for a dollar-euro rate of $1.35.

Mr Bloom warned that if the pound were to fall it could tumble even further than the dollar as there would be little interest from other countries to prop it up.