"Street Critique"-Robert Lynch, Currency Strategist at HSBC
Wednesday, June 10, 2009PAUL KANGAS: Tonight's "Street Critique" guest says the U.S. economy green shoots have taken a toll on the U.S. dollar. He's Robert Lynch, currency strategist at HSBC and Bob, welcome to the program.
ROBERT LYNCH, CURRENCY STRATEGIST, HSBC: Thanks, very much.
KANGAS: The greenback has not been benefiting from these economic green shoots. Why not?
LYNCH: I think it's important, number one, to look at where the dollar has come from. When the economic and financial market stresses intensified in the second half of 2008, the dollar had appreciated by 25 to 30 percent in some cases even more as it was one of the only things that global investors were willing to hold. What we've seen as risk appetite has returned to the market as the green shoots have developed and equity markets have rebounded from the lows reached earlier this year. We've seen some unwinding of those long dollar positions and that's resulting in a pretty sizable drop in the dollar.
KANGAS: Would that make the dollar weakness short-term then?
LYNCH: Not necessarily. As we look at what the U.S. government is doing in terms of vastly expanding its debt issuance, running up deficit and debt to GDP ratios both this year and plans to do so in the coming years as well the recent expansion of the Fed's balance sheet, we're looking at a lot of extra dollars in the market that weren't there six to 12 months ago and we're really concerned about the propensity of global investors to absorb all those dollars and we think it's going to be a problem for the currency over the immediate term.
KANGAS: Is that why stock investors should watch the dollar closely?
LYNCH: It's certainly one of the problems or one of the issues that they need to watch. One of the things that we worry about with the weakness is the dollar is the inflationary implications of a weaker dollar and we don't think that's necessarily much of a issue. But one of the things that's creeping into financial markets more generally alongside the recent rise of interest rates that have occurred are concerns that once again this vast expansion of the fiscal deficit in the United States could be inflationary down the road. So it's certainly something that's important for all financial markets.
KANGAS: What is your biggest concern about the greenback?
LYNCH: Certainly the idea that of this potential debasement of the dollar. Now we don't think that there's going to be any threat to the U.S. triple-A credit rating but you can't expand the Federal debt in the manner than has been done recently and not at least raise some concerns about that issue in the market and even those perceptions in the market I think are enough to drive the dollar down over the medium term.
KANGAS: We only have about 30 seconds left Bob, but I'd like to know if you've put any credence in these recent reports that OPEC may dump the dollar as the currency for trading oil.
LYNCH: We don't necessarily put much credence in those reports, but certainly, that gets back to the idea of the dollar being used as the world's primary reserve currency. We think that it will remain the world's primary reserve currency but that its status will be eroded gradually over time as it has over the past 10 years or so. So while that will remain an issue, a topical feature in the market and maybe even be problematic for the dollar at times, while the market is concerned about the reserve currency status, we still see the dollar as remaining the world's primary reserve currency.
KANGAS: Interesting indeed, Bob, I want to thank you for sharing your insights with us.
LYNCH: Thanks very much.
KANGAS: My guest, Robert Lynch of HSBC.
