The dollar, euro and pound are all unappealing investments, either because of policies of “benign neglect” or concerns on the euro region’s stability, said Stephen King, chief economist at HSBC Holdings Plc.
“It is a competition between ugly sisters, they are none of them particularly attractive” he said in an interview today in London. In the U.S. and U.K., “there will be a policy of a desire not so much to drive the currency low, but a policy of benign neglect. If the dollar weakens and sterling weakens, the authorities in those countries will be more than happy.”
The European Central Bank won’t want to see a weaker euro because that would imply a loss of investor confidence in the single currency, King said. The euro has dropped against the dollar and sterling on concern that Greece won’t get a rescue package to help it meet its debt payments.
“If the euro weakens, it’s more a worry about the stability of the euro zone and that’s more of a concern to the ECB,” he said. “You’ve got on the one hand the benign neglect approach from the States and the U.K., on the other you have the worries about the structural integrity of the euro, which is obviously weakening the euro.”
King’s book, “Losing Control: The Emerging Threats to Western Prosperity,” will be published next month.
The euro is down about 1.5 percent against the dollar this month and traded at $1.3331 as of 2:39 p.m. in London. The currency has dropped 3.3 percent against the pound in the same period to 86.13 pence.
King said the advantages of a weaker currency in tackling public deficits suggests the dollar will decline in the coming years. President Barack Obama’s proposed budget calls for a $1.6 trillion deficit in 2010, compared with last year’s record $1.4 trillion shortfall.
“My guess is over a year or two years the dollar would go back to its underlying tendency to decline,” King said. “If you’ve got the world reserve currency, take advantage of it. There are plenty of people who are willing to hold it, so go for the depreciation, it’s not like you can do too much damage.”
The U.S., Britain and some European countries are similar in that they all have big budget deficits that will require higher taxes and public spending cutbacks, King said. He said the advantage for the U.S. is that it can exploit demand for the dollar to fund its “enormous” borrowing.
Creditors of the U.S. will eventually sour on that arrangement, and may raise demands for other American assets or move away from the greenback as the world reserve currency, King said. He said the U.S.’s practice is similar to the Catholic church’s sale of indulgences in medieval times.
“You’re making a promise to people not for a wonderful afterlife, so to speak, but making a promise in this case that U.S. taxpayers in the future will pay you back,” he said. “The chances of that promise being met are actually quite low. And the difficulty with this is that eventually the creditor nations will begin to realize that buying IOUs from the U.S. is ultimately not in their interest.”