In the current environment of financial crisis where the euro has taken a severe beating, the dollar which is the most liquid currency in the world is gaining ground. According to David Bloom, Global Head, Forex Strategy at HSBC, people see it as a reserve currency where one can flee to in times of distress.
While the weakening of the euro will continue for some more time till the Greek elections. Bloom is of the opinion that when the US election comes about, the dollar will weaken and the euro will look better.
Below is the edited transcript of Bloom’s interview with CNBC-TV18. Also watch the accompanying video.
Q: Where do you expect the dollar to go keeping in mind that most people expect that the underlying growth in the US in the second half will be a lot weaker?
A: Yes, growth is irrelevant, we are living through a financial crisis at the moment and that’s what matters. As far as the dollar is concerned, it is the most liquid currency in the world. People still see it as a reserve currency of the world and it is a currency people flee to in times of distress.
This doesn’t mean it has got value; it’s got function and liquidity - that’s what people want for now. When we get back to a normal environment, then you start looking at growth and inflation in other aspects.
Q: What do you think happens to the euro in this environment of financial crisis? It has continued to weaken now below around 125 mark. How do you expect the euro to work or trade over the next several months especially if we're seeing the strengthening prospects of a Greek exit?
A: The problem with currency markets and all markets is that it is binary. You have to try and guess the outcome of the Greek election, then you have to try and guess what they will do. So it has become very complicated but obviously this is not good news for the euro. So, the euro is weakening and will continue to weaken for a little while yet because the elections are still some time to come, they are in the middle of next month.
But once these elections are passed and the situation settles down, we’ll probably get intervention by the ECB (European Central Bank) and we could even get more QE (Quantitative Easing) from the Fed and the Bank of England if the situation gets out of hand.
The tail end of the year has another big political event which is the US election. When that comes about then the dollar will weaken and the euro will look better. So, for the short term, the euro is under a lot of pressure but as the year progresses, I think the dollar will come under pressure once again.
Q: How high do you rate the probability of a third round of QE by Fed or LTRO (Long-term refinancing operations) by the ECB?
A: Talking about a third round of QE is dependent on what happens with Greece. If Greece says we want to stay in the euro, there is very little chance. If Greece says we want to leave the euro then the chances are that the markets needs stabilization and the central banks will have to come in and calm the markets.
Q: When you say QE, do you mean that generically or are you referring to a third round by the Fed. Do you think the Fed is also likely to respond as the ECB would if there was to be a Greece exit?
A: It is not clear, we will just have an LTRO. The ECB could get more aggressive and do something else besides another LTRO. Other central banks will have to try and help the healing of the situation. They have only got QE in their locker. So I think if the situation gets out of hand and they look so contingent, you should expect the ECB, the monetary policy commission (MPC), the Bank of Japan, the Fed, everybody to come in and try and stabilize these markets.
Q: I know it is difficult to assess but what will happen over the course of the next few months if we were to see a euro exit or if Greece were to exit? How much stronger do you see the dollar getting from here onwards?
A: Here, there is a knee-jerk reaction. So if Greece left the knee-jerk reaction would be to buy treasuries, buy the dollar and you could still see the dollar rally perhaps another 5% or so. Once things settle down and you get intervention by all the separate central banks around the world, which could take a little while, then things will settle down and that move will be reversed.
The question is what happens to Greece. If it works out fantastically for Greece then the incentive for Portugal and Spain to leave is very big. But if Greece leaves and the Greek economy falls to pieces then nobody else would want to follow their path. That would mean that the idea of Spain and Portugal leaving becomes actually smaller. But once that happens, then the euro will rally. So there are different outcomes but there are also different outcomes for each one in the short-term, medium-term and longer-term.