Soros warning as Dow smashes 11,000

The Dow Jones index of leading US shares broke through the 11,000 mark for the first time in more than four years yesterday.

Strong demand for US equities sent the index up 44 points, or 0.4 per cent, to 11,001.82, in early trade. The last time it crossed 11,000 was 13 June 2001, when stocks were falling. It means the Dow, often seen as a proxy for the state of the world economy, is just 6 per cent shy of the all-time record of 11,750.28 reached on 14 January 2000.

Analysts gave the news a cautious welcome, saying it was a purely psychological milestone and appeared to be driven by speculation the US Federal Reserve was close to finishing its programme of interest rate rises. Richard Franulovich, senior currency strategist at Westpac in New York, said: "There are pretty clear-cut signs that US housing is slowing. Commodities are still pretty strong and that argues for a problematic picture for equities as 2006 progresses." He added: "I wonder whether that might be a last hurrah for US equities."

Traders ignored a warning by George Soros that the US was in danger of plunging into recession if the Fed raised rates too high. The billionaire investor, whose comments are closely studied by the markets four years after he retired from active trading, said the biggest risk to the world economy was a US house price crash.

He said he expected interest rates, currently at 4.25 per cent, to peak at 4.75 per cent. But he warned the Fed could be late in deciding to stop raising rates, creating a "reasonably significant chance" of a "hard landing". Mr Soros said: "If housing continues to cool while rates are slowing then it could turn into a hard landing. That's why I expect a recession to happen in 2007, not 2006." The Fed has raised its main rate 13 times from 1 per cent to 4.25 per cent since it started tightening monetary policy midway through 2004.

Mr Soros said there was a risk the Fed might raise rates more than was needed to slow growth and curb inflation. He also said he feared the economies of Europe and Japan would not be in a position to offset the impact of a US recession.