Dollar as reserve of value

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View of the Day: The untouchable dollar

By David Bloom

Published: January 27 2009 15:11 | Last updated: January 27 2009 15:11

The cost of insuring Californian debt relative to the US is miles higher than Spain versus Germany.

This does not seem to be a concern to the FX market and is the type of inconsistency that David Bloom, global head of FX strategy at HSBC, finds difficult to come to terms with.

He says he expected fears over sovereign risk to become a driver of the currency market. Indeed, both the euro and sterling have suffered as those worries have come to the fore in recent weeks.

But, the FX market is not pricing in any concerns over the US.

Mr Bloom says this is irrational, meaning either the US is beyond risk, or, when it is priced in, the dollar will suffer.

“We find it odd that the market seems to be ignoring the issue of sovereign risk in the US,” he says. “The market makes no allowance for any US problems as far as the currency is concerned.”

But Mr Bloom says once the euphoria over Barack Obama’s inauguration as US president passes, focus will shift to the reality of the US fiscal deficit.

“The US seems to be untouchable. We believe a sudden and dramatic shift in sentiment will occur when the market questions US sovereign [risk] , just like it has with the eurozone and the UK,” he says.

When this happens, the dollar will move lower argues Mr Bloom.

“The dollar’s reserve currency status will wear a bit thin as the US fiscal deficit balloons.”

Copyright The Financial Times Limited 2009

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