Dollar Can Withstand U.S. Ratings Downgrade, HSBC’s Bloom Says

The dollar is unlikely to suffer a “cataclysmic selloff” should the U.S. lose its AAA credit rating, given investors’ limited alternatives to the world’s reserve currency, according to HSBC Holdings Plc.

A deal between President Barack Obama and Republicans struck over the weekend aims to raise the $14.3 trillion federal borrowing limit enough to fund the government until 2013 while cutting spending by $2.4 trillion over the next decade. The House voted 269-161 yesterday to approve the measure while Congressional leaders voiced confidence a Senate vote today will ratify the debt-limit compromise and avert a default.

“If the U.S. is downgraded, the dollar might sell off at the margins, but there isn’t going to be a slam-dunk, cataclysmic selloff that is suddenly going to make everyone hate the dollar and love the euro,” said David Bloom, London-based global head of currency strategy at HSBC Holdings Plc. “The problem with currencies is that if you sell one you have to buy another, and there isn’t really an alternative to the dollar. The unfortunate thing about bunds is that they’re issued in euros.”

The dollar strengthened for a second day against the euro, appreciating 0.6 percent to $1.4162 to the shared currency at 8:31 a.m. in London.

Standard & Poor’s said on July 14 that it may downgrade the U.S., giving 50 percent odds that the credit rating would be cut within 90 days, even if an agreement was reached on raising the federal borrowing limit.

“People still have faith in the U.S. and faith in the dollar as the world’s reserve currency,” said Bloom. “The U.S. is a massive market and it’s hard to get away from it.”

HSBC sees dollar ending the year at $1.44 per euro, according to Bloom. Still, the U.S. currency’s value is likely to be gradually “eroded over time,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE